UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                              to                                           

DIGITAL ANGEL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Delaware		43-1641533
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

490 Villaume Avenue
South Saint Paul, Minnesota 55075
(Address of principal executive offices, including zip code)

(651) 455-1621
Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

(Title of each class)		(Name of each exchange on which registered)
Common Stock, $0.01 par value		NASDAQ Capital Market

Securities registered pursuant to Section 12(g) of the Act: Not applicable

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

At June 30, 2009, the aggregate market value of the voting and non-voting common stock held by non-affiliates was approximately $25.1 million, computed by reference to the price at which the stock was last sold on that date of $1.44 per share reported on the National Association of Securities Dealers Automated Quotation System.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

Class		Outstanding at March 30, 2010
Common Stock, $.01 par value per share		27,576,381 shares

Documents Incorporated by Reference: Parts of the definitive Proxy Statement for the 2010 Annual Meeting of Stockholders which the Registrant intends to file with the Securities and Exchange Commission within 120 days after the end of the Registrant’s fiscal year ended December 31, 2009, are incorporated by reference in Part III of this Annual Report on Form 10-K to the extent described herein. If the Registrant does not file its Proxy Statement with the Commission on or before 120 days after the end of its 2009 fiscal year, the Registrant will file the required information in an amendment to this Annual Report on Form 10-K.

 

 

DIGITAL ANGEL CORPORATION
TABLE OF CONTENTS

Item		Description		Page
		PART I
1.		Business		3
1A.		Risk Factors		11
2.		Properties		17
3.		Legal Proceedings		17
		PART II
5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		18
7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
8.		Financial Statements		32
9.		Changes In and Disagreements with Accountants on Accounting and Financial Disclosure		32
9A(T).		Controls and Procedures		32
		PART III
10.		Directors, Executive Officers and Corporate Governance		33
11.		Executive Compensation		33
12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		33
13.		Certain Relationships and Related Transactions, and Director Independence		33
14.		Principal Accountant Fees and Services		33
		PART IV
15.		Exhibits and Financial Statements		33
		Signatures		34
Exhibit 10.81 Asset Sale and Purchase Agreement
Exhibit 21.1 List of Subsidiaries
Exhibit 23.1 Consent of Independent Registered Public Accounting Firm
Exhibit 31.1 302 Certificate of Chief Executive Officer
Exhibit 31.2 302 Certificate of Chief Financial Officer
Exhibit 32.1 906 Certificate of Chief Executive Officer
Exhibit 32.2 906 Certificate of Chief Financial Officer

PART 1

ITEM 1. BUSINESS

Unless the context otherwise provides, when we refer to the “Company,” “we,” “Digital Angel,” or “us,” we are referring to Digital Angel Corporation and its subsidiaries (either wholly- or majority-owned).

Overview

As of December 31, 2009, our business operations consisted primarily of the operations of our wholly-owned subsidiary, Destron Fearing Corporation and its wholly-owned subsidiaries, which collectively we refer to in this Annual Report as Destron Fearing, and our 98.5% owned subsidiary, Signature Industries Limited (“Signature”). Currently we operate in two business segments: Animal Identification, which comprises the operations of Destron Fearing; and Emergency Identification, which comprises the operations of Signature.

We currently engage in the following principal business activities:

	•		Our Animal Identification segment develops, manufactures and markets visual and electronic identification tags and implantable radio frequency identification (“RFID”) microchips, primarily for identification, tracking and location of companion pets, livestock (e.g., cattle and hogs), horses, fish and wildlife worldwide, and, more recently, for animal bio-sensing applications, such as temperature reading for companion pet and livestock applications; and
	•		Our Emergency Identification segment develops, manufactures and markets global position systems (“GPS”) and GPS-enabled products used for emergency location and tracking of pilots, aircraft and maritime vehicles in remote locations as well as sound horn alarms.

Discontinued Operations

During the years ended December 31, 2009 and 2008, we sold several non-core businesses and we discontinued one business, Thermo Life Energy Corp. (“Thermo Life”), which was sold on January 21, 2010. On November 12, 2008, we sold all of the common stock that we owned in PositiveID Corporation, formerly, VeriChip Corporation, (“PSID”) (Nasdaq:PSID), which was approximately 45.6% of PSID’s then issued and outstanding shares of common stock. In addition, on November 20, 2009, we sold the assets and equity of one of Signature’s business units, McMurdo Limited (“McMurdo”). Accordingly, the financial results of these businesses are now classified as discontinued operations for all periods presented in this Annual Report. Our decision to sell/discontinue these businesses was a result of management’s strategy to streamline operations. Going forward, our strategy is to focus our efforts on the business operations of our Animal Identification segment. Discontinued operations are more fully discussed in Note 14 to our consolidated financial statements.

Internet Website

Our Internet website address is www.digitalangel.com. Our segments’ internet website addresses are: www.destronfearing.com and www.signatureindustries.com. The information on these websites is not incorporated by reference into this Annual Report on Form 10-K. We make available free of charge through our website annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Forms 3, 4 and 5 filings, and all amendments to those reports and filings as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”).

**************

Effective April 20, 2007, we became a Delaware corporation. We initially incorporated in the state of Missouri on May 11, 1993. Currently, our principal executive offices are located at 490 Villaume Avenue, South Saint Paul, Minnesota 55075 (651-455-1621).

Recent Events

Notice of Nasdaq Delisting

On December 10, 2009, we received a letter from the Nasdaq Stock Market (the “Nasdaq”) indicating that we are not in compliance with Nasdaq’s requirements for continued listing because, for the previous 30 consecutive business days, the bid price of our common stock closed below the minimum $1.00 per share price requirement for continued inclusion under Nasdaq Marketplace Rule 4310(c)(4) (the “Rule”). In accordance with the Nasdaq Marketplace Rules, we have been provided 180 calendar days, or until June 8, 2010, to regain compliance with the Rule.

If, at any time before June 8, 2010, the bid price of our common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, the Nasdaq staff will provide us written notification that we are in compliance with the Rule. However, if we do not regain compliance with the Rule by June 8, 2010, the Nasdaq staff will determine whether we meet the Nasdaq Capital Market initial listing criteria set forth in Marketplace Rule 4310(c), except for the bid price requirement, and if we do, we will be granted an additional 180 calendar day compliance period. Since December 10, 2009, our stock has traded below $1.00. Presently, we believe that we meet all of the initial listing criteria except for the minimum bid price requirement based on the closing price of our common stock on March 31, 2010.

Repayment of Existing Term Debt Obligations

On December 14, 2009, we, and certain of our subsidiaries, entered into an amendment to a letter agreement with Laurus Master Fund, Ltd. and certain of its affiliates, including, Kallina Corporation and LV Administrative Services, Inc., (the “Lenders”), to amend, among other things, the repayment schedule of all amounts owed pursuant to certain existing term debt obligations. Under the terms of the amended letter amendment, we were obligated to pay $3.8 million of the existing term debt obligations to the Lenders, of which $3.0 million was paid in cash (which included the November 2009 monthly payment) and $0.8 million was paid within three days of the date of the letter agreement through the issuance of approximately 1.4 million shares of our common stock in accordance with the terms of a previous 2008 agreement. After the prepayment, the balance of the existing debt obligations, which was approximately $1.4 million, was payable in full to the Lenders on or before the original maturity date of February 1, 2010. On February 1, 2010, the outstanding principal and interest due under the existing debt obligations were paid in full.

Registered Direct Offering and Sale of Common Stock and Warrants

On February 9, 2010, we sold, in a registered direct offering, 3,385,000 shares of our common stock and warrants to purchase 1,354,000 shares of common stock to two institutional investors pursuant to the terms of a securities purchase agreement we entered into on February 3, 2010. The purchase price of the securities was $1.7 million in the aggregate. The exercise price of the warrants is $0.50 per share and the warrants may be immediately exercised and expire seven years from the date of issuance. The warrants are not exercisable by a holder to the extent that such holder or any of its affiliates would beneficially own in excess of 4.9% of our common stock. We entered into a placement agent agreement with Chardan Capital Markets, LLC (“Chardan”) relating to our registered direct offering where we agreed to pay Chardan a placement agent fee of 6.0% of the gross proceeds from the sale. The net proceeds from the sale, after deducting the placement agent fee and other offering expenses, were approximately $1.6 million and were used primarily to replenish the funds used for the repayment of existing term debt obligations as discussed above. The terms of the warrants are more fully described in Note 23 to our consolidated financial statements.

Termination of Standby Equity Distribution Agreement

On July 10, 2009, we entered into a Standby Equity Distribution Agreement (the “SEDA”) with YA Global Master SPV Ltd. (“YA SPV”), an affiliate of Yorkville Advisors, for the sale of up to $5.0 million of shares of our common stock over a two-year commitment period. Under the terms of the SEDA, we could from time to time, at our discretion, sell newly-issued shares of our common stock to YA SPV. We issued shares of our common stock under the SEDA pursuant to a Registration Statement on Form S-3 (Registration No. 333-159880), declared effective by the SEC on July 9, 2009 wherein we registered 3.0 million shares of our common stock.

The SEDA required payment of a commitment fee payable to YA SPV in an amount equal to $125,000. We delivered approximately 88 thousand shares of common stock under the Registration Statement to pay the commitment fee. The price of the shares delivered was the average of the daily Volume Weighted Average Price (“VWAP”) for the three trading days after the date of the Agreement. During the year ended December 31, 2009, we issued approximately 2.9 million shares of our common stock and received approximately $2.8 million in cash under the SEDA. On January 19, 2010, we issued an additional 0.1 million shares of our common stock and received approximately $0.1 million in cash under the SEDA. In connection with the registered direct offering, we terminated the SEDA effective February 4, 2010.

Industry Overview

Our principal activities encompass the development and marketing of RFID and GPS-enabled identification and location products.

RFID technology continues to grow in its importance to the animal identification industry. RFID systems identify objects using radio frequency transmissions, typically achieved with communication between a microchip or tag and a scanner or reader. Historically, RFID has been used to identify objects in retail, transportation and logistics industries, as well as to identify and locate livestock and companion pets. Prior to the adoption of RFID, users identified and tracked objects manually as well as through the use of bar code technology. These solutions were limited because of the need for ongoing human intervention and the lack of instantaneous location capabilities. RFID technology possesses greater range, accuracy, speed and lower line-of-sight requirements than bar code technology.

Our RFID businesses focus on companion pet and equine identification and safeguarding, livestock/fish identification tracking and food safety and traceability (e.g., livestock tracking).

The basic components of an RFID system consist of:

	•		a “tag,” containing a microchip-equipped transponder, an antenna and a capacitor, attached to the item to be identified, located or tracked, which wirelessly transmits stored information to a receiver;
	•		one or more receivers, also referred to as “readers” or “scanners”, which are devices that read the tag by sending out an RF signal to which a tag, in the range of the signal, responds; and
	•		the equipment, cabling, computer network and software applications to use the processed data for one or more applications.

Most RFID systems use either “active” or “passive” tags, with the choice reflecting the different characteristics of the tags and the nature of the RFID system application. The key difference in the technology is that active RFID systems deploy tags with battery-powered microchips that emit a signal at regular intervals or continuously and do not rely on power from the reader to operate, while passive RFID systems deploy tags with microchips that have no attached power supply and receive an activating charge from the reader’s signal. Applications that require receipt of signals between the tag and the reader beyond approximately 10 meters in range usually require a battery in the tags. Currently, we sell passive RFID tags.

Pet Identification and Safeguarding

Pet identification and safeguarding systems involve the insertion of a microchip with identifying information in the animal. Readers at animal shelters, veterinary clinics and other locations can determine the animal’s owner and other information through RFID scanners. The pet identification and safeguarding market is expanding at accelerated levels. In the USA, more and more shelters promote the use of microchipping as a way to insure that a lost pet can be reunited with its owner. With only an estimated 10% of pets chipped, the U.S. pet market has significant growth potential. As a result of the recent expansion of the capabilities of the electronic chips (e.g., providing feedback on the health of the animal, such as a temperature reading), we believe the market will expand even further. In Europe, microchips are required for any pets traveling across borders. These “pet passports” allow the animal to travel freely throughout Europe without quarantine, and in some European countries, as many as 40% of the pets have electronic identification.

Livestock/Fish Identification and Tracking and Food Safety and Traceability

The use of RFID technology in the tracking of livestock in the U.S. is currently limited to utilization for herd management (breeding, performance, etc), USDA disease control programs (Brucellosis, Tuberculosis, etc.) and Marketing programs (Non-Hormone Treated Cattle and limited use for the Beef Export Verification Program). Recently the US federal government announced that it would discontinue the USDA’s National Animal Identification System (NAIS), moving traceability responsibilities to the state and tribal levels. The USDA will work with the states to establish a common system for animals transported across state lines. While NAIS at the federal level has been discontinued, 48-hour trace-back, and age and source verification will remain a central part of the livestock industry’s processes. Destron Fearing products have been widely adopted for these requirements, and we continue to see more opportunities from growth in these segments. At Destron Fearing, our business model has always been to develop and sell innovative herd management products to producers that add value to their businesses. We have developed programs that make it easier for producers to do business with us, and to provide them with products that enhance their productivity and business success. Our RFID products are focused on gaining information, such as monitored animal behavior, and yielding data that can achieve early detection of potential illnesses in their herds.

Internationally, the market place for electronic identification tags continues to grow. The need to combat animal disease has the European Union (EU) focusing on improved traceability of livestock. Beginning on December 31, 2009, the EU has mandated the use of electronic tags for all sheep and goats, which is a forerunner to eventually requiring all large animal livestock to have electronic tags in the future. It is planned to be implemented in the entire European herd over the next few years. In South America, Brazil, with approximately 200 million cattle, has implemented a mandatory electronic identification of all feed lot cattle on January 1, 2010. Effective December 31, 2010, all new born cattle in Brazil will be required to have electronic tags, with the objective to move the entire herd to electronic tags over the next three years. Similar implementations are occurring in other South American countries, such as Colombia and Chile. These are all favorable signs for our Animal Identification segment, and the outlook shows signs of growth.

Emergency Identification

Global Navigation Satellite System (“GNSS”) is the standard generic term for satellite navigation systems that provide autonomous geospatial positioning with global coverage. The Navigation Satellite Timing and Ranging Global Position System (“NAVSTAR GPS”), which was developed by the U.S. Department of Defense, is the only fully operational GNSS. The satellite constellation is managed by the U.S. Air Force 50th Space Wing. Although the cost of maintaining the system is approximately $400 million per year, including the replacement of aging satellites, GPS is free for civilian use as a public good. In addition to NAVSTAR GPS, there is some indication that other nations may begin deploying GNSS. The Russian GLONASS is a GNSS in the process of being restored to full operation. The European Union Galileo positioning system is a next generation GNSS in the initial deployment phase, scheduled to be operational in a few years, and China has indicated it may expand its regional Beidou navigation system into a global system.

A GPS receiver calculates its position by measuring the distance between itself and three or more GPS satellites. Measuring the time delay between transmission and reception of each GPS radio signal gives the distance to each satellite, since the signal travels at a known speed. The signals also carry information about the satellites’ location. By determining the position of, and distance to, at least three satellites, the receiver can compute its position using trilateration. Receivers typically do not have perfectly accurate clocks and, therefore, track one or more additional satellites to correct the receiver’s clock error.

The original motivation for satellite navigation was for military applications. Today, GNSS systems have a wide variety of civilian uses such as:

	•		navigation, ranging from personal hand-held devices for trekking, to devices fitted to cars, trucks, ships and aircraft;
	•		synchronization;
	•		location-based services such as enhanced 911;
	•		surveying;

	•		entering data into a geographic information system;
	•		search and rescue;
	•		geophysical sciences; and
	•		tracking devices used in wildlife management.

Our focus is in the areas of search and rescue and locator beacons and tracking systems which include mobile satellite data communications service and software for messaging for a variety of markets including the military, law enforcement and energy market. We believe that there is excellent growth potential in each of our markets and particularly, for us, in sales of our military personal location beacons due to recent technology improvements. However, each market in which we compete is highly competitive.

Operating Segments

Financial Information About Our Segments

Revenues from our two segments over the past two years were as follows:

		For the years ended December 31,
		2009				2008
		(in thousands)
Animal Identification		$	30,774			$	38,501
Emergency Identification			18,689				23,759
Total		$	49,463			$	62,260

Refer to the segment information in Note 19 to our consolidated financial statements.

Animal Identification Segment

Principal Products and Services

Our Animal Identification segment develops, manufactures and markets visual and electronic identification tags and implantable RFID microchips, primarily for identification, tracking and location of companion pets, livestock (e.g., cattle and hogs), horses, fish and wildlife worldwide, and, more recently, for animal bio-sensing applications, such as temperature reading for companion pet and livestock applications. Our Animal Identification segment’s proprietary products focus on pet identification and safeguarding, as well as the positive identification and tracking of livestock and fish, which is crucial for asset management and for disease control and food safety. This segment’s principal products are:

	•		visual and electronic ear tags for livestock; and
	•		implantable microchips and RFID scanners for the companion pet, livestock, horses, fish and wildlife industries.

The Animal Identification segment consists of Destron Fearing’s operations located in Minnesota and its wholly-owned subsidiaries: DSD Holding A/S and Destron Fearing A/S and its subsidiaries, which have operations in Denmark and Poland (collectively referred to as “Destron Fearing A/S”); and Digital Angel International, Inc. and its subsidiaries located in Argentina, Brazil, Chile, Paraguay and Uruguay.

We hold patents on our syringe-injectable microchip for use in animals. Each microchip is individually inscribed and programmed to store a unique, permanent 10 to 16-digit alphanumeric identification code. These microchips are tiny, passive electronic devices ranging in size from 8 to 28 millimeters in length and 2.1 to 3.5 millimeters in diameter. The smallest microchip is about the size of a grain of rice. The microchip is coupled with an antenna and placed either in a two-piece plastic e.Tag™ or in a glass-like injectable capsule. The e.Tag™ is typically affixed to the ear of the animal. The implantable microchip is injected under the skin using a hypodermic syringe, without requiring surgery. Each capsule is coated with a polymer, BioBond^TM, to form adherence to tissue, thereby preventing migration in the host’s body. An associated scanner device uses radio frequency to interrogate the microchips and read the code. Our patented Bio-Thermo^® implantable microchip product provides temperature readings of animals by simply passing an RFID handheld scanner over the animal or by having the animal walk through a portal scanner.

Our pet identification and location system involves the insertion of a microchip, with identifying information, in the animal. Scanners located at animal shelters, veterinary clinics and other locations can determine the animal’s owner and other information. Presently, there is an established infrastructure with RFID scanners placed in approximately 70,000 global animal shelters and veterinary clinics. We believe that approximately 4.0 million companion animals in the U.S. have been enrolled in our distributor’s database, and a pet is recovered in the U.S. by that system approximately every six minutes.

Our miniature RFID microchips are also used for the tagging of fish, especially salmon, for identification by biologists and governments in environmental programs and studies, migratory studies and other purposes. These microchips are accepted as a safe, reliable alternative to traditional identification methods because once the fish are implanted with the microchips, they can be identified without recapturing or sacrificing the fish. In 2006, we installed what is believed to be the world’s largest RFID ready system, a 16-foot by 16-foot RFID antenna designed to electronically track indigenous salmon populations. In addition, we launched our second generation unitary core transponders. These updated transponders are designed to provide greater reader reliability while increasing reader range.

In addition to pursuing the market for permanent identification of companion animals and tracking microchips for fish, we also produce visual and RFID identification products, for livestock producers. The tracking of cattle and hogs is crucial in order to provide security both for asset management and for disease control and food safety. Destron Fearing has marketed visual identification products for livestock since the 1940s. Visual identification products typically include numbered ear tags. Electronic identification products for livestock are currently being utilized by livestock producers and as part of various pilot studies for the USDA’s and other state and governmental cattle identification programs. Currently, sales of visual products represent a substantial percentage of our sales to livestock producers.

Growth Strategy

The principal components of our Animal Identification segment’s growth strategy are to:

	•		focus on animal identification products in the growing livestock, fish and wildlife industries;
	•		become a major player in the food source traceability and safety tracking systems arena; and
	•		increase our market share in the pet identification and equine markets with enhanced products such as our temperature-sensing Bio-Thermo® product.

Through our Animal Identification segment, we are one of the leading suppliers in the U.S. of RFID-enabled implantable microchip products for companion animals, laboratory animals, wildlife, and visual identification tags for livestock. The “chipping” of companion pets has increased in Europe, in part, because in 2004, several European countries began requiring that all pets crossing their borders be identified with a either a tattoo or a microchip. In addition, world-wide standardization of the frequency on which the microchips operate will most likely lead to higher world-wide chipping rates. Our chips can be read by the world standard, which is 134.2 kilohertz.

During 2006, we began a national initiative to target the use of our microchips to address the more than $100 million estimated U.S. equine market for identification products. There are approximately 9.2 million horses in the U.S. We believe that approximately 6.0 million are competition horses requiring identification by local and state equine animal health rules and regulations. In addition, USDA’s NAIS business plan categorizes equines as medium priority for permanent identification. Since late 2005, the California Horseracing Board, a division of the California Department of Agriculture, has been implanting all new, in-coming young horses entering their racing career with our microchips, which we call LifeChips^®. The State of Louisiana has also been utilizing our LifeChips^® to identify horses that have been Coggins tested which checks for Equine Infectious Anemia. The New York State Horse Health Assurance Program implemented a comprehensive health campaign that utilizes our microchips, and other state agencies are expected to launch similar programs. In addition, in March 2008, we entered into a non-exclusive distribution agreement with The Jockey Club, the official registry for North American Thoroughbred horses. The coming of the 2010 World Equestrian Games in October is expected to boost LifeChip sales both domestically and abroad. Additional growth in LifeChip sales is expected to come from the recent requirement in Mexico, where all horses entering their country must have microchips.

New Products

In July 2009, we introduced the DTR-4 handheld reader enhancing the feature set of the already robust DTR-3 reader. The DTR-4 reader added an LCD display, providing easy to read ID numbers, and body temperatures when coupled with our Bio-Thermo^® tags. Useful in cattle, swine, and equine applications, the display provides the user with the ability to see tag data without having to communicate with a host computer.

In December of 2009, we finished phase three of the development of the new reader for the fisheries business. This reader advances the ability for stream and river applications, replacing older multiplexing technologies providing communication with multiple antennas designed from low cost materials that can be found at a local hardware store, reducing the overall cost to monitor fish migrations in all conditions. Field testing begins during the spawning season in early 2010.

We also introduced in 2009 our Rapid Response program, where customers can place orders for identification tags in the morning and we will ship that same afternoon, eliminating long waiting periods when tags are urgently needed. Various other sales programs were introduced to make it easy for customers to do business with us. Examples include on-line order capabilities and credit card ordering.

Sales, Marketing and Distribution

Our companion pet identification and location system is marketed in the U.S. by Schering-Plough Animal Health Corporation (“Schering-Plough”) under the brand name Home Again^® Pet Recovery Service. In February 2007, we signed an exclusive product supply and distribution agreement with Schering-Plough Home Again LLC, a wholly owned subsidiary of Schering-Plough, to provide electronic identification microchips and scanners as part of the Home Again^® Proactive Pet Recovery Network. Schering-Plough’s network, which markets the complete electronic pet identification system under the brand name HomeAgain^®, is the nation’s first comprehensive system to assist in the search for lost pets. In January, 2010, we entered into an amendment to the February 2007 agreement, which extends our agreement to provide Schering-Plough electronic identification microchips and scanners as part of the Home Again^® Proactive Pet Recovery Network through June 2010. During the term of the amended agreement, we will exclusively manufacture, supply and sell to Schering-Plough and Schering-Plough will exclusively purchase from us certain products (as defined in the amended agreement). The amended agreement contains, among other things, minimum purchase requirements by Schering-Plough. The amended agreement also prohibits us from manufacturing, supplying or selling the products to any other person, governmental authority or entity in the territory (as defined in the amended agreement). The amended agreement also grants to Schering-Plough exclusive distribution, marketing and sale rights to our RFID products in the companion animal market in the U.S. and non-exclusive distribution, marketing and sale rights to our RFID Bio Thermo product in the designated animal markets and territories, subject to a maximum amount of units of such RFID Bio Thermo products.

Currently our companion pet/equine product is also marketed by various other companies, including, but not limited to, (i) in some countries in Europe by Merial Pharmaceutical under the Indexel^® brand; (ii) in the United Kingdom (U.K.) and Ireland by Animalcare under the idENTICHIP^® brand; and (iii) in other European countries and in Australia, New Zealand and Japan by various distributors under the LifeChip^® brand.

BioMark, Inc. is our exclusive U.S. distributor for our fish and wildlife RFID microchip products. Electronic identification products for livestock are sold directly to our customers under the Destron brand. We have multi-year supply and distribution agreements with certain of our customers, which have varying expiration dates. The remaining terms of such agreements are between one and eight years. The supply and distribution agreements describe products, delivery and payment terms and distribution territories. Our agreements generally do not have minimum purchase requirements and can be terminated without penalty. Our principal customers for electronic identification devices for fish are Pacific States Marine and the U.S. Army Corps of Engineers. The loss of, or a significant reduction in, orders from either of these customers could have a material adverse effect on our financial condition and results of operations.

Competition

The animal identification market is highly competitive. The principal competitors in the U.S. visual identification market are Allflex USA, Inc. and Y-Tex Corporation, and the principal competitors in the U.S. RFID identification market are Allflex, USA, Inc., Datamars SA and Avid Identification Systems, Inc. We believe that our intellectual property position and our reputation for high quality products are our competitive advantages.

Our principal competitor in Europe is Allflex, with the remainder of the market quite fragmented with regional players. We believe that our efficient low cost production, reputation for high quality ear tags and our clear focus on the market are our competitive advantages. We expect our competitors to continue to improve the performance of and support for their current products. We also expect that, like us, they will introduce new products, technologies or services. Our competitors’ new or upgraded products could adversely affect sales of our current and future products.

Manufacturing; Supply Arrangements

Our Animal Identification segment has not been materially or adversely affected by the inability to obtain raw materials or products during the past three years. We rely on a production arrangement with Raytheon Microelectronics Espana (“RME”), a subsidiary of Raytheon Company, for the assembly of certain of our patented syringe-injectable transponders. The term of that agreement ends on June 30, 2010, subject to earlier termination by either party if, among other things, the other party breaches the agreement and does not remedy the breach within 30 days of receiving notice. Under the agreement, RME is our preferred supplier of the glass encapsulated, syringe-implantable transponders, provided that RME’s pricing remains market competitive. Certain of the automated equipment and tooling used in the production of the transponders is owned by us; other automated equipment and tooling is owned by RME. We are currently in discussions to establish a new long term agreement with RME.

Besides RME, our Animal Identification segment’s other principal suppliers are TSI Molding, Inc., Feature Products and Creation Technologies. We generally do not enter into contracts with these suppliers.

Emergency Identification Segment

Principal Products and Services

Our Emergency Identification segment’s proprietary products provide emergency location and tracking of pilots, aircraft and maritime vehicles in remote locations as well as sound horn alarms. This segment’s principal products are:

	•		GPS enabled search and rescue equipment and intelligent communications products and services for mobile data and radio communications applications, including our SARBETM brand which serves commercial and military markets; and
	•		alarm sounders for industrial use and other electronic components.

GPS Enabled Search and Rescue Equipment and Intelligent Communications Products

Our personal locator beacons (“PLBs”) are sold under the SARBE™ brand name. SARBE products are primarily used by military air crew in the event of an ejection or other event requiring emergency evacuation of an aircraft in a remote, possibly hostile location. SARBE equipment is also used by land and naval forces. Signature is based in the U.K. and has been developing and manufacturing PLBs for five decades. Reports of Second World War airmen and sailors at sea awaiting rescue with little more than the faint hope that a passing ship would find them was the catalyst that inspired Signature to develop a new way of saving lives by making the search part of search and rescue more effective. Today, we believe that we are a world-leading supplier of PLBs and our SARBE trademark is a common term for these devices, which are now found on ships, aircraft and submarines in the armed forces of over 40 countries. U.K. airmen were among the first to carry these lifesaving devices. Today every U.K. Royal Air Force, Royal Navy and Army airman carries a SARBE. PLBs are also packed in the survival packs of life rafts on military ships. Our latest generation SARBE™ for military personnel is the software programmable SARBE G2R, which provides true global reach and recovery. This flexible radio features peacetime and combat modes. As with previous PLBs, G2R can be configured to operate with any fast jet ejection seat and incorporates a specially designed system that automatically activates the beacon and deploys the antenna to the optimum position. This ensures that even if aircrew are unconscious or injured, the SARBE transmission will be initiated immediately as no human intervention is required, reducing the time it takes to initiate a search. Our SARBE^TM G2R has been approved to operate on the COSPAS-SARSAT Satellite System. COSPAS-SARSAT is the internationally funded satellite system operator that detects activated search and rescue beacons and is responsible for approving all rescue beacons. Beginning February 1, 2009, COSPAS-SARSAT no longer monitored beacons using 121.5 MHz and 243 MHz satellite frequencies. The outdated beacons need to be replaced by the new generation of 406 MHz beacons, such as our SARBE G2R. We anticipate that this new requirement will have a favorable impact on our revenue in 2010 and beyond.

We are also a distributor of two-way communications equipment in the U.K. Our products range from conventional radio systems for the majority of radio users, for example, safety and security, construction, manufacturing, to trunked radio systems for large scale users, such as local authorities and public utilities. We also offer marine radios, air band radios and satellite communication equipment for use on a global basis.

Alarm Sounders

We manufacture electronic alarm sounders under the Clifford & Snell name. These products are used to provide audible and or visual signals, which alert personnel in hazardous areas, including the oil and petrochemical industry, and in the fire and security market. Our recent Yodalex explosion proof sounders and strobes include an omni-directional, high-sound output with sounder/strobe combination all sharing a common explosion proof enclosure.

Growth Strategy

We believe that our SARBE PLBs offer the greatest source of growth for our Emergency Identification segment. COSPAS-SARSAT forecasts that the global population of the new generation of digital beacons will grow from 400,000 today, to 900,000 by 2012, providing us with opportunities to upgrade existing customers’ equipment and sell into new markets. We expect to see an increase in the demand for our beacons as air forces upgrade their PLBs to new digital standards. Air forces in the U.K. and the U.S. will be required to replace their existing beacons with the new generation 406 MHz beacons in the future. SARBE has developed a specific new product, the AAPLB, for the USAF and UK Ministry of Defense (“MoD”). In September 2008, the UK MoD selected our AAPLB for tri-service use. We expect to begin shipping our AAPLBs to the MoD in the latter part of 2010.

Sales and Distribution

We sell our PLBs directly to our customers worldwide through a direct sales force of approximately four personnel and through supply and distribution agreements, which have varying expiration dates. The remaining terms of such agreements are between one and three years.

We sell our alarm sounders through various distributors located in Europe, Australia, New Zealand, Hong Kong, Japan, South Africa, Singapore and the U.S. We are also a distributor of two-way communication equipment in the U.K.. Our agreements with these distributors have varying expiration dates.

Competition

Principal methods of competition in our Emergency Identification segment include geographic coverage, service and product performance. The principal competitors for our PLBs are Boeing North American Inc., General Dynamics Decision Systems, Tadiran, Spectralink Ltd., Becker Avionic Systems, and ACR Electronics, Inc. We believe that introducing new leading edge products in the search and rescue beacon market and the use of our search and rescue beacons in over forty countries are competitive advantages. In addition, the barriers to entry in this market are high due to the technical demands of the market.

Manufacturing; Supply Arrangements

Our Emergency Identification segment has not been materially or adversely affected by the inability to obtain raw materials or products during the past three years. This segment’s principal suppliers are Contact Components Ltd., Motorola Ltd., and Delta Impact Ltd. We generally do not enter into contracts with these suppliers.

Government Regulation

Animal Identification Laws and Regulations

Our passive RFID systems rely on low-power, localized use of the radio frequency spectrum to operate. As a result, we must comply with U.S. Federal Communications Commission (“FCC”) and Industry Canada (“IC”) regulations, as well as the laws and regulations of other jurisdictions in which we sell our products, governing the design, testing, marketing, operation and sale of RFID devices. Accordingly, all of our products and systems have the FCC equipment authorization, the IC equipment authorization, or other jurisdictions’ authorizations, as appropriate.

U.S. Federal Communications Commission Regulations

Under FCC rules and regulations and Section 302 of the Communications Act, RFID devices, including those we market and sell, must be authorized and comply with all applicable technical standards and labeling requirements prior to being marketed in the U.S. The FCC’s rules prescribe technical, operational and design requirements for devices that operate on the electromagnetic spectrum at very low power levels. The rules ensure that such devices do not cause interference to licensed spectrum services, mislead consumers regarding their operational capabilities or produce emissions that are harmful to human health. Our RFID devices are intentional radiators, as defined in the FCC’s rules. As such, our devices may not cause harmful interference to licensed services and must accept any interference received. Additionally, we must construct all equipment in accordance with good engineering design and manufacturers’ practices. The FCC rules also establish standards for labeling, user manuals, recordkeeping and testing. We believe that we are in substantial compliance with all FCC requirements applicable to our products and systems.

Industry Canada Regulations

Industry Canada regulates the design, sale and use of radio communications devices in accordance with its Radio Standards Specifications (“RSS”) and Radio Standards Procedures (“RSP”). As intentional emitters, our RFID devices are subject to Industry Canada’s RSP-100, which establishes the procedures by which RFID communications equipment receives certification by Industry Canada. The RSP-100 certification procedure and RSS standards ensure that RFID radio devices do not cause interference to licensed spectrum services and that the devices do not produce emissions that are harmful to human health.

Manufacturers of RFID devices must demonstrate compliance with RSP-100 and RSS-210, which establish standards for obtaining certification of services, obtaining unique certification/registration numbers, display and label requirements on the equipment, user manuals, recordkeeping and testing. We believe we are in substantial compliance with all Industry Canada requirements applicable to our products and systems.

Emergency Identification Laws and Regulations

The manufacture and distribution of our emergency identification products are subject to compliance with applicable regulatory requirements in both the country of manufacture and in those countries where these products are sold. We must comply with local, state, federal/national, and international laws and regulations in the countries in which we do business, including environmental, technical, communications, and other laws and regulations governing the manufacture of our products, their technical specifications, their labeling and communications protocols, user manuals, and recordkeeping and testing. We believe that we are in substantial compliance with all FCC requirements applicable to our emergency identification products and systems.

Intellectual Property

In both our Animal Identification and Emergency Identification segments, we rely on a combination of patents, copyrights, trademarks, trade secrets (including know-how), employee intellectual property agreements, and third-party agreements to establish and protect proprietary rights in our products and technologies. It is our practice to seek protections in all jurisdictions where such protections are deemed useful and desirable to our business and competitive interests.

We believe our global patent portfolio will continue to provide a competitive advantage in protecting innovation, although our competitors in each business are actively seeking patent protection as well.

In the Animal Identification segment, some of our more important patents and intellectual property rights include those relating to the design and manufacture of RFID tags and readers, including their communications protocols, reader scanning algorithms, reader self testing methods, manufacturing methods for unitary antenna cores, improved antenna designs, injection molding techniques, and temperature sensing and communication capabilities. No one patent is considered material to this business segment.

In the Emergency Identification segment, some of our more important patents and intellectual property rights include those relating to the design and manufacture of locator beacons, sensing and alarm devices, and their communications protocols. No one patent is considered material to this business segment.

Our trademarks include the following: Digital Angel, Destron Fearing, Bio-Thermo and SARBE.

Seasonality

No significant portion of our business is considered to be seasonal; however, our Animal Identification and Emergency Identification segments’ revenue, while not considered to be seasonal, may vary significantly based on government procurement cycles and technological development, and our Animal Identification segment’s revenues and operating income can be affected by the timing of animal reproduction cycles.

Employees

At March 19, 2010, we and our subsidiaries employed approximately 244 employees, of which 223 are full-time. Our Animal Identification segment’s production workforce located in South Saint Paul, Minnesota is party to a collective bargaining agreement covering wage rates and benefits for certain union employees, which expires on April 30, 2010. Upon termination there are no future obligations other than payments of accrued wages.

Geographic Areas

We have operations and sales in various regions of the world. Additionally, we export and import to and from other countries. Our operations may, therefore, be subject to volatility because of currency fluctuations, inflation and changes in political and economic conditions in these countries. Sales and expenses are denominated in local currencies and may be affected as currency fluctuations affect our product prices and operating costs or those of our competitors.

Currently, we operate in three geographic areas: the U.S. and Europe (both of which comprise the majority of our operations) and South America. The majority of our revenues and expenses in each geographic area were generated in the same currencies during the two-years ended December 31, 2009, and accordingly, we did not incur any significant foreign currency gains or losses during those years.

Revenues from continuing operations are attributed to geographic areas based on the location of the assets producing the revenue. Information concerning revenues by principal geographic areas as of and for the years ended December 31, 2009 and 2008 was as follows (in thousands):

		United								South
		States				Europe				America				Total
2009
Net revenue		$	21,694			$	27,074			$	695			$	49,463
Property and equipment, net			4,854				2,390				119				7,363
2008
Net revenue		$	29,275			$	31,927			$	1,058			$	62,260
Property and equipment, net			5,764				2,544				241				8,549

For a discussion of risks associated with our foreign operations, please see Item 1A. Risk Factors.

Each of our segment’s operating income (loss) is presented below in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and each of their assets is presented in Note 19 to our consolidated financial statements.

ITEM 1A. RISK FACTORS

We have a history of operating losses and we may not become profitable in the future, which could ultimately result in our inability to continue operations in the normal course of business.

We incurred a consolidated loss from continuing operations of $15.4 million and $59.6 million in the years ended December 31, 2009 and 2008, respectively. Our consolidated operating activities (used) provided cash of $(3.9) million and $1.3 million during the years ended December 31, 2009 and 2008, respectively. As of December 31, 2009, we had an accumulated deficit of approximately $571.2 million. There is no assurance that our operating activities will be able to fund our cash requirements in the future if our investing and/or financing activities cannot.

Historical losses and maturity of debt have raised concerns about our ability to continue operations at the current level.

Our historical sources of liquidity have included proceeds from the sale of common stock and preferred shares, proceeds from the issuance of debt, proceeds from the sale of businesses, and proceeds from the exercise of stock options and warrants. In addition to these sources, other sources of liquidity may include the raising of capital through additional private placements or public offerings of debt or equity securities. However, going forward some of these sources may not be available, or if available, they may not be on favorable terms especially if we continue to incur losses. We will be required to generate funds to repay certain of our debt obligations during 2010. We recently used a portion of the proceeds from the sale of our McMurdo business unit, which we sold on November 30, 2009, as more fully discussed in Note 14 to our consolidated financial statements, to repay a portion of our term debt and in February 2010, we fully repaid our term debt obligations with proceeds from the sale of shares of our common stock and warrants. As of December 31, 2009, we had a working capital deficiency, which is partially due to a number of our debt obligations becoming due or potentially due within the next twelve months, including the maturity on August 31, 2010 of a revolving line of credit which had a balance of approximately $2.2 million at December 31, 2009, and a mortgage loan of approximately $2.0 million, which matures on November 1, 2010. Our credit facility with Danske Bank, which is more fully discussed in Note 9 to our consolidated financial statements, is due on demand and we are required to make monthly principal payments of approximately $0.1 million. Our factoring lines may also be amended or terminated at any time by the lenders. These conditions indicate that we may not be able to continue operations at the current level, as we may be unable to generate the funds necessary to pay our obligations in the ordinary course of business. Our ability to continue operations at the current level is also discussed below in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Our ability in the future to achieve or sustain profitability is based on a number of factors, many of which are beyond our control, including the future demand for our RFID and GPS satellite-based systems and the technical requirements associated with the manufacture of our GPS products. If demand for such systems does not reach anticipated levels, or if we fail to manage our cost structure or to develop technologically viable products, we may not achieve profitability.

Our capital requirements depend on a variety of factors, including but not limited to, the rate of increase or decrease in our existing business base; the success, timing, and amount of investment required to bring new products on-line; revenue growth or decline; and potential acquisitions or divestitures. We have established a management plan to guide us in achieving profitability and positive cash flows from operations during 2010. No assurance can be given that we will be successful in implementing the plan. Failure to generate positive cash flow from operations will have a material adverse effect on our business, financial condition and results of operations.

If we fail to continue to meet all applicable Nasdaq Capital Market requirements, our stock could be delisted by the Nasdaq Capital Market. If delisting occurs, it could adversely affect the market liquidity of our common stock and harm our businesses.

Our common stock is currently traded on the Nasdaq Capital Market under the symbol “DIGA.” On December 10, 2009, we received a letter from Nasdaq indicating that we were not in compliance with the Nasdaq’s requirements for continued listing because, for the previous 30 consecutive business days, the bid price of our common stock closed below the minimum $1.00 per share price requirement for continued inclusion under Nasdaq Marketplace Rule 4310(c)(4) (the “Rule”). In accordance with the Nasdaq Marketplace Rules, the Company has been provided 180 calendar days, or until June 8, 2010, to regain compliance with the Rule.

If, at any time before June 8, 2010, the bid price of our common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, the Nasdaq staff will provide us written notification that were are in compliance with the Rule. However, if we do not regain compliance with the Rule by June 8, 2010, the Nasdaq staff will determine whether we meet the Nasdaq Capital Market initial listing criteria set forth in Marketplace Rule 4310(c), except for the bid price requirement, and if we do, we will be granted an additional 180 calendar day compliance period. Presently, we believe that we meet all of the initial listing criteria except for the minimum bid price requirement, based on the closing price of our common stock on March 31, 2010. However, if the market value of shares of our common stock held by non-affiliates is below the initial listing criteria on June 8, 2010, we intend to submit an appeal to Nasdaq to allow us an extension of time to gain compliance. If we are not successful, and Nasdaq delists our common stock, it would likely trade on the OTC Bulletin Board, an electronic bulletin board established for unlisted securities. Such delisting could adversely affect the market liquidity, our ability to obtain financing for the continuation of our operations and could result in the loss of confidence by investors, suppliers and employees.

In addition, if we fail to meet any of the other continued listing standards of the Nasdaq Capital Market, our common stock could be delisted from the Nasdaq Capital Market. These continued listing standards include specifically enumerated criteria, such as:

	•		shareholders’ equity of $2.5 million, market value of publicly-held shares of $35 million, or net income from continuing operations of $500,000 in the most recently completed fiscal year or in two of the last three most recently completed fiscal years;
	•		500,000 shares of publicly-held common stock with a market value of at least $1 million;
	•		300 round-lot stockholders; and
	•		compliance with Nasdaq’s corporate governance requirements, as well as additional or more stringent criteria that may be applied in the exercise of Nasdaq’s discretionary authority.

We have substantial debt and debt service.

As of December 31, 2009, our indebtedness, totaled approximately $9.7 million, and we had advances on our factoring lines of approximately $1.2 million. As a result, we incur significant interest expense. In addition, we are obligated to make monthly principal payments on certain of our notes. Our revolving line of credit, which had an outstanding balance of approximately $2.2 million at December 31, 2009, matures on August 31, 2010 and our outstanding mortgage debt of approximately $2.0 million matures on November 1, 2010. In addition, we are obligated to make monthly principal payments of approximately $0.1 million on our outstanding credit line with Danske Bank. On February 1, 2010, we repaid the remaining outstanding balance of approximately $1.4 million of our term debt that matured in February 2010. For further discussion on our debt, see Note 9 to the consolidated financial statements.

Our debt agreements contain certain events of default, including, among other things, failure to pay, violation of covenants, and certain other expressly enumerated events. Additionally, we guaranteed Destron Fearing’s debt with Kallina Corporation (approximately $2.2 million at December 31, 2009) as well as granted Kallina Corporation a security interest in substantially all of our U.S. assets, and pledged all of the issued and outstanding capital stock we own in certain of our subsidiaries to secure such debt.

The degree to which we are leveraged could have important consequences, including the following:

	•		our ability to obtain additional or replacement financing in the future for operations, capital expenditures, potential acquisitions, and other purposes may be limited, or financing may not be available on terms favorable to us or at all;
	•		a substantial portion of our cash flows from operations must be used to pay our interest expense and repay our debt, which reduces the funds that would otherwise be available to us for our operations and future business opportunities; and
	•		our ability to continue operations at the current level could be negatively affected if we cannot refinance our obligations before their due date.

A default under any of our debt agreements could result in acceleration of debt payments and it could permit the lender to foreclose on our assets and the stock we have pledged in our subsidiaries. We cannot assure you that we will be able to maintain compliance with these covenants. Failure to maintain compliance could have a material adverse impact on our financial position, results of operations and cash flow.

We have effected or entered into (and will likely continue to effect or enter into) capital raising transactions, acquisitions, legal settlements and contracts for services that involve the issuance of shares of our common stock (or securities convertible into or exchangeable for such shares) and, if such transactions occur, investments in our common stock will be further diluted.

We currently have a legal settlement and an earn-out obligation aggregating approximately $3.3 million, both of which we currently intend to settle in shares of our common stock. The legal settlement may be settled in unregistered shares of our common stock and the earn-out obligation (to the extent we owe any) must be settled in registered shares of our common stock. During 2009, we sold approximately 2.9 million shares to YA SPV under the SEDA and on February 9, 2010, we sold approximately 3.4 million shares of our common stock and warrants to purchase approximately 1.4 million shares of our common stock in a registered direct offering. Such share issuances have in the past been and we expect will in the future be dilutive to the value of our common stock. As a result, your investment in our common stock will be further diluted if such transactions occur.

Certain events over which you will have no control could result in the issuance of additional shares of our common stock or other securities, which could dilute the value of shares of our common stock. We may issue additional shares of common stock:

	•		to raise additional capital;
	•		upon the exercise of outstanding options and stock purchase warrants or additional options and warrants issued in the future;
	•		in connection with severance agreements;
	•		in connection with loans or other capital raising transactions; and
	•		in connection with acquisitions of other businesses or assets.

As of March 19, 2010, there were 1,667,674 outstanding warrants, with exercise prices per share ranging from $0.50 to $25.443, and 3,188,747 options to acquire additional shares of our common stock, with exercise prices per share ranging from $0.32 to $216.60. If exercised, these securities could dilute the value of shares of our common stock. In addition, we have the authority to issue up to a total of 50,000,000 shares of common stock and up to 5,000,000 shares of preferred stock without further shareholder approval, including shares that could be convertible into our common stock, subject to applicable Nasdaq requirements for issuing additional shares of stock. Were we to issue any such shares, or enter into any other financing transactions, the terms may have the effect of significantly diluting or adversely affecting the holdings or the rights of the holders of our common stock.

Volatility in economic conditions and the financial markets may adversely affect our industry, business and financial performance.

We have witnessed unprecedented disruptions in financial markets, including volatility in asset values and constraints on the availability of credit. In response to these developments, the U.S. government has taken, and may take further, steps designed to stabilize markets generally and strengthen financial institutions in particular. The impact, if any, that these financial market events or these governmental actions might have on us and our business is uncertain and cannot be estimated at this time. If current economic conditions deteriorate or legislation or regulatory action adversely affects the U.S. economy, there could be an adverse impact on our access to capital and to our results of operations.

Our stock price has reflected a great deal of volatility, including a significant decrease over the past few years. The volatility may mean that, at times, our stockholders may be unable to resell their shares at or above the price at which they acquired them.

From January 1, 2007 to March 19, 2010, the price per share of our common stock has ranged from a high of $18.00 to a low of $0.39. The price of our common stock has been, and may continue to be, highly volatile and subject to wide fluctuations. The market value of our common stock has declined in the past, in part, due to our operating performance. In the future, broad market and industry factors may decrease the market price of our common stock, regardless of our actual operating performance. Recent declines in the market price of our common stock could affect our access to capital, and may, if continuing, impact our ability to continue operations at the current level. In addition, any continuation of the recent declines in the price of our common stock may harm employee morale and retention, curtail investment opportunities presented to us, and negatively impact other aspects of our business. As a result of any such declines, many stockholders have been or may become unable to resell their shares at or above the price at which they acquired them.

We rely heavily on revenues derived from sales to various governmental agencies, and the loss of, or a significant reduction in, orders from government agencies could result in significant losses and negative changes to cash flows from operations.

Our principal customers for electronic identification devices for fish are Pacific States Marine, a government contractor that relies on funding from the U.S. government, and the U.S. Army Corps of Engineers. Our Emergency Identification segment is heavily dependent on contracts with domestic government agencies and foreign governments, including the U.K., primarily relating to military applications. Because we rely on revenues and cash flows generated from contracts, directly or indirectly, with governmental agencies, the loss of any such contract would result in a decrease in revenues and cash flows, and such a decrease may be significant and thereby have a material adverse effect on our financial condition and results of operations.

Our Animal Identification segment relies heavily on revenue from a principal distributor and two customers and the loss of the principal distributor and customers could negatively affect our revenue, cash flows and results of operations.

Our pet identification and location system is marketed in the U.S. by Schering-Plough. For the years ended December 31, 2009 and 2008, Schering-Plough accounted for approximately 8% and 19%, respectively, of our Animal Identification segment’s revenues. It may be difficult and time-consuming for us to arrange for distribution of the implantable microchip by a third party. The loss of Schering-Plough as our exclusive distributor could negatively affect future sales. In January 2010, we amended our exclusive product supply and distribution agreement with Schering-Plough to extend the agreement through June 2010. There is no assurance that Schering-Plough and Destron Fearing will extend the contract beyond June 2010. Our principal customers for electronic identification devices for fish are Pacific States Marine and the U.S. Army Corps of Engineers. The loss of, or a significant reduction in, orders from these customers could have a material adverse effect on our financial condition and results of operations.

We depend on a small team of senior management and key employees, and we may have difficulty attracting and retaining additional personnel.

Our future success will depend in large part upon the continued services and performance of key senior management and other key personnel. If we lose the services of any key member of our senior management team, our overall operations could be materially and adversely affected. In addition, our future success will depend on our ability to identify, attract, hire, train, retain and motivate other highly skilled technical, managerial, marketing, purchasing and customer service personnel when they are needed. Competition for qualified individuals to fill these positions is intense. We cannot ensure that we will be able to successfully attract, integrate or retain sufficiently qualified personnel when the need arises. Any failure to attract and retain the necessary technical, managerial, marketing, purchasing and customer service personnel could have a material adverse effect on our financial condition and results of operations.

The loss of any key senior executive could materially adversely affect our financial results. Our senior executives, in many cases, have strong relationships with our customers, suppliers and lenders. Therefore, the loss of the services of such senior executives or any general instability in the composition of our senior management could have a negative impact on our relationship with these customers and suppliers.

Over the past few years, we have made significant changes in the nature and scope of our businesses.

If we are not successful in implementing our business model and developing and marketing our products or if these products do not gain sufficient market acceptance, we may not be able to achieve or sustain profitable operations. In that case, the market price of our stock would likely decrease.

Management continues to review strategic alternatives to increase shareholder value, which may result in a further decrease in consolidated revenue and the overall size of our operations.

Management is focusing on various strategic alternatives, which include the possibility of selling additional business units in our Emergency Identification segment. If we are successful in further streamlining our business to focus our attention solely on our Animal Identification business segment, it would, at least in the short term, result in a further decrease in our revenue and the size of our operations. Such a decrease could negatively impact the price of our common stock.

Technological change could cause our products and technology to become obsolete or require the redesign of our products, which could have a material adverse effect on our businesses.

Technological changes within the industries in which we conduct business may require us to expend substantial resources in an effort to develop new products and technology. We may not be able to anticipate or respond to technological changes in a timely manner, and our response may not result in successful product development and timely product introductions. If we are unable to anticipate or respond to technological changes, our businesses could be adversely affected.

We may be subject to costly product liability claims from the use of our systems, which could damage our reputation, impair the marketability of our systems and force us to pay costs and damages that may not be covered by adequate insurance.

Manufacturing, marketing, selling, testing and operation of our systems entail a risk of product liability. We could be subject to product liability claims in the event our systems fail to perform as intended. Even unsuccessful claims against us could result in the expenditure of funds in litigation, the diversion of management time and resources, damage to our reputation and impairment in the marketability of our systems. While we maintain liability insurance, it is possible that a successful claim could be made against us, that the amount of our insurance coverage would not be adequate to cover the costs of defending against or paying such a claim, or that damages payable by us would harm our business.

If others assert that our products infringe their intellectual property rights, we may be drawn into costly disputes and risk paying substantial damages or losing the right to sell our products.

We face the risk of adverse claims and litigation alleging infringement of the intellectual property rights of others. If infringement claims are brought against us or our suppliers, these assertions could distract management and necessitate our expending potentially significant funds and resources to defend or settle such claims. We cannot be certain that we will have the financial resources to defend ourselves against any patent or other intellectual property litigation. If we or our suppliers are unsuccessful in any challenge to our rights to market and sell our products, we may, among other things, be required to:

•

pay actual damages, royalties, lost profits and/or increased damages and the third party’s attorneys’ fees, which may be substantial;

	•		cease the development, manufacture, use and/or sale of products that use the intellectual property in question through a court-imposed sanction called an injunction;
	•		expend significant resources to modify or redesign our products, manufacturing processes or other technology so that it does not infringe others’ intellectual property rights or to develop or acquire non-infringing technology, which may not be possible; or
	•		obtain licenses to the disputed rights, which could require us to pay substantial upfront fees and future royalty payments and may not be available to us on acceptable terms, if at all, or to cease marketing the challenged products.

Ultimately, we could be prevented from selling a product or otherwise be forced to cease some aspect of our business operations as a result of any intellectual property litigation. Even if we or our suppliers are successful in defending an infringement claim, the expense, time delay, and burden on management of litigation and negative publicity could have a material adverse effect on our business.

We obtain the implantable microchip used in certain of our Animal Identification segment’s products from a single supplier, making us vulnerable to supply disruptions that could constrain our sales of such systems and/or increase the per-unit cost of production of the microchip.

At present, we source the microchip for certain of our products from Raytheon Microelectronics España S.A. (“RME”), the actual manufacturer, under a supply agreement between us and RME for use in our Animal Identification segment’s products. The term of that agreement expires on June 30, 2010, subject to earlier termination by either party if, among other things, the other party breaches the agreement and does not remedy the breach within 30 days of receiving notice. We and RME each own certain of the automated equipment and tooling used in the manufacture of the microchip. Accordingly, it would be difficult for us to arrange for a third party other than RME to manufacture the implantable microchip to satisfy our requirements. Even if we were able to arrange to have the implantable microchip manufactured in another facility, we believe that making such arrangements and commencement of production could take at least three to six months. A supply disruption of this length could cause customers to cancel orders, negatively affect future sales and damage our business reputation. In addition, the per-unit cost of production at another facility could be more than the price per unit that we currently pay.

The expiration or invalidation of patents covering products and technologies in our Animal Identification segment could expose us to potential competition that may have a material adverse effect on our sales and results of operations.

We rely on various patents covering microchip and reader products used in our Animal Identification segment. Without patent protection, our competitors may be able to independently develop similar technology or duplicate our systems, or the value of our products could be diminished which could have a material adverse effect on our sales and results of operations.

Our inability to safeguard our intellectual property may adversely affect our business by causing us to lose a competitive advantage or by forcing us to engage in costly and time-consuming litigation to defend or enforce our rights.

We rely on copyrights, trademarks, trade secret protections, know-how and contractual safeguards to protect our non-patented intellectual property, including our software technologies. Our employees, consultants and advisors are required to enter into confidentiality agreements that prohibit the disclosure or use of our confidential information. We also have entered into confidentiality agreements to protect our confidential information delivered to third parties for research and other purposes. There can be no assurance that we will be able to effectively enforce these agreements, the confidential information will not be disclosed, others will not independently develop substantially equivalent confidential information and techniques or otherwise gain access to our confidential information, or that we can meaningfully protect our confidential information. Costly and time-consuming litigation could be necessary for enforcement and failure to maintain the confidentiality of our confidential information could adversely affect our business by causing us to lose a competitive advantage maintained through such confidential information.

Disputes may arise in the future with respect to the ownership of rights to any technology developed with third parties. These and other possible disagreements could lead to delays in the collaborative research, development or commercialization of our systems, or could require or result in costly and time-consuming litigation that may not be decided in our favor. Any such event could have a material adverse effect on our business, financial condition and results of operations by delaying our ability to commercialize innovations or by diverting our resources away from revenue-generating projects.

We compete with other companies in the visual and electronic identification and locator markets, and the products sold by our competitors could become more popular than our products or render our products obsolete.

The markets for visual and electronic identification and beacon products are highly competitive. We believe that our principal competitors in the visual identification market for livestock are AllFlex USA and Y-Tex Corporation, that our principal competitors in the electronic identification market are AllFlex USA, Datamars SA and Avid Identification Systems, Inc., and that our principal competitors in the beacon market are Boeing North American Inc., General Dynamics Decision Systems, Tadiran Spectralink Ltd., and Becker Avionic Systems.

In addition, other companies could enter these lines of business in the future. Many of our competitors have substantially greater financial and other resources than us. We may not be able to compete successfully with our competitors, and our competitors may develop or market technologies and products that are more widely accepted than our products or that would render our products obsolete or noncompetitive.

Infringement by third parties on our intellectual property or development of substantially equivalent proprietary technology by our competitors could negatively affect our businesses.

Our success depends significantly on our ability to:

	•		maintain patent and trade secret protection;
	•		obtain future patents and licenses; and
	•		operate without infringing on the proprietary rights of third parties.

There can be no assurance that the measures we have taken to protect our intellectual property will prevent the misappropriation or circumvention of our intellectual property. In addition, there can be no assurance that any patent application, when filed, will result in an issued patent, or that our existing patents, or any patents that may be issued in the future, will provide us with significant protection against competitors. Moreover, there can be no assurance that any patents issued to or licensed by us will not be infringed upon or circumvented by others. Litigation to establish the validity of patents and to assert infringement claims against others can be expensive and time-consuming, even if the outcome, which is often uncertain, is in our favor. Infringement of our intellectual property or the development of substantially equivalent technology by competitors could have a material adverse effect on our business.

Our efforts to protect our intellectual property may be less effective in some foreign countries where intellectual property rights are not as well protected as in the U.S.

The laws of some foreign countries do not protect intellectual property to as great an extent as do the laws of the U.S. Policing unauthorized use of the intellectual property utilized in our systems and system components is difficult, and there is a risk that our means of protecting our intellectual property may prove inadequate in these countries. Our competitors in these countries may independently develop similar technology or duplicate our systems, which would likely reduce our sales in these countries. Furthermore, some of our patent rights may be limited in enforceability to the U.S. or certain other select countries, which may limit our intellectual property protection abroad.

Domestic and foreign government regulation and other factors could impair our ability to develop and sell our products in certain markets.

The electronic animal identification market can be negatively affected by such factors as food safety concerns, price, consumer perceptions regarding cost and efficacy, international technology standards, government regulation and slaughterhouse removal of microchips.

We are also subject to federal, state and local regulation in the U.S., including regulation by the FDA, the FCC and the USDA, and similar regulatory bodies in other countries. We cannot predict the extent to which we may be affected by further legislative and regulatory developments concerning our products and markets. We are required to obtain regulatory approval before marketing most of our products. The regulatory process can be very time-consuming and costly, and there is no assurance that we will receive the regulatory approvals necessary to sell our products under development. Regulatory authorities also have the authority to revoke approval of previously approved products for cause, to request recalls of products and to close manufacturing plants in response to violations. Any such regulatory action, including the failure to obtain such approval, could prevent us from selling, or materially impair our ability to sell, our products in certain markets and could negatively affect our businesses.

Our results of operations may be adversely affected if we write-off additional goodwill and other intangible assets.

During the fourth quarter of 2009, we recorded an impairment charge of $7.1 million for goodwill and intangible assets associated with our Emergency Identification reporting unit. During the third quarter and fourth quarter of 2008, we recorded impairment charges of $26.2 million and $4.1 million, respectively, for goodwill associated with our Animal Identification segment. As of December 31, 2009, we had approximately $14.8 million of goodwill and intangible assets. We assess the fair value of our goodwill and other intangible assets annually or earlier if events occur or circumstances change that would more likely than not reduce the fair value of these assets below their carrying value. If we determine that significant additional impairment has occurred, we will be required to write off the impaired portion of goodwill and our other intangible assets. Additional impairment charges could have a material adverse effect on our operating results and financial condition.

We face the risk that the value of our inventory may decline before it is sold or that our inventory may not be able to be sold at anticipated prices.

On December 31, 2009, the book value of our inventory was $9.8 million. Our inventory could decline in value as a result of technological obsolescence or a change in the product. Our success depends in part on our ability to minimize the cost to purchase/produce inventory and turn that inventory rapidly through sales. The failure to turn such inventory may require us to sell such inventory at a discount or at a loss or write down its value, which could result in significant losses and decreases in our cash flows.

Our foreign operations pose additional risks.

We operate our businesses and market our products internationally. During the years ended December 31, 2009 and 2008, approximately 60% and 55% of our sales were to private and public businesses in non U.S. countries. Our foreign operations are subject to the risks described herein, as well as risks related to compliance with foreign laws and other economic or political uncertainties. International sales are subject to risks related to general economic conditions, currency exchange rate fluctuations, imposition of tariffs, quotas, trade barriers and other restrictions, enforcement of remedies in foreign jurisdictions and compliance with applicable foreign laws and foreign corrupt practices act, and other economic and political uncertainties. All of these risks could result in increased costs or decreased revenues, which could have an adverse effect on our financial results.

Currency exchange rate fluctuations could have an adverse effect on our sales and financial results.

During the years ended December 31, 2009 and 2008, we generated approximately 56% and 53%, respectively, of our sales and incurred a portion of our expenses in currencies other than U.S. dollars. We incurred approximately $0.6 million and $(2.3) million of other comprehensive income (loss) due to fluctuations in foreign currency exchange rates. To the extent that going forward we are unable to match revenues received in foreign currencies with costs paid in the same currency, exchange rate fluctuations in any such currency could have an adverse effect on our financial results.

If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements could be impaired, which could adversely affect our operating results, our ability to operate our business and our stock price.

During the course of our testing of our internal controls, we may identify, and have to disclose, material weaknesses or significant deficiencies in our internal controls that will have to be remediated. Implementing any appropriate changes to our internal controls may require specific compliance training of our directors, officers and employees, entail substantial costs in order to modify our existing accounting systems, and take a significant period of time to complete. Such changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. In addition, investors’ perceptions that our internal controls are inadequate or that we are unable to produce accurate financial statements may negatively affect our stock price.

ITEM 2. PROPERTIES

At December 31, 2009, we were obligated under leases for approximately 82,720 square feet of facilities, of which 29,931 square feet was for office facilities and 52,789 square feet was for factory and warehouse space. These leases expire at various dates through 2042. In addition, we own 31,892 square feet of office space and 47,800 square feet of factory and warehouse facilities at the locations below. Our owned property is subject to a mortgage as discussed in Note 9 to our consolidated financial statements.

The following table sets forth our owned and leased properties by business segment (amounts in square feet):

										Factory /
		Office								Warehouse								Total
		Owned				Leased				Owned				Leased				Owned				Leased
Animal Identification			31,892				4,464				47,800				8,005				79,692				12,469
Emergency Identification			—				25,467				—				44,784				—				70,251
Total			31,892				29,931				47,800				52,789				79,692				82,720

The following table sets forth the principal locations of our properties (amounts in square feet):

										Factory /
		Office								Warehouse								Total
		Owned				Leased				Owned				Leased				Owned				Leased
Europe			—				4,416				—				8,005				—				12,421
Minnesota			31,892				—				47,800				—				79,692				—
South America			—				48				—				—				—				48
Texas			—				4,966				—				—				—				4,966
United Kingdom			—				20,501				—				44,784				—				65,285
Total			31,892				29,931				47,800				52,789				79,692				82,720

ITEM 3. LEGAL PROCEEDINGS

We are involved in legal proceedings from time to time. We have accrued to the extent practicable our estimate of the probable costs for the resolution of these claims. Our estimate has been developed in consultation with outside counsel handling our defense in these matters and is based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future results of operations or cash flows for any particular quarterly or annual period could be materially affected by changes in our estimates. See Note 18 to our consolidated financial statements for a description of certain legal proceedings.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the Nasdaq Capital Market under the symbol “DIGA.”

The following table shows, for the periods indicated, the high and low sales prices per share of our common stock based on published financial sources.

		High				Low
2009
First Quarter		$	0.68			$	0.40
Second Quarter			1.70				0.69
Third Quarter			1.49				1.03
Fourth Quarter			1.25				0.62
2008
First Quarter		$	7.36			$	4.16
Second Quarter			6.88				4.88
Third Quarter			6.16				2.64
Fourth Quarter			2.88				0.36

On March 19, 2010, the closing sale price of our common stock on the Nasdaq Capital Market was $0.46 per share.

On December 10, 2009, we received a letter from Nasdaq indicating that we were not in compliance with the Nasdaq’s requirements for continued listing because, for the previous 30 consecutive business days, the bid price of our common stock closed below the minimum $1.00 per share price requirement for continued inclusion under Nasdaq Marketplace Rule 4310(c)(4) (the “Rule”). In accordance with the Nasdaq Marketplace Rules, the Company was provided 180 calendar days, or until June 8, 2010, to regain compliance with the Rule. If, at any time before June 8, 2010, the bid price of our common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, the Nasdaq staff will provide us written notification that were are in compliance with the Rule. However, if we do not regain compliance with the Rule by June 8, 2010, the Nasdaq staff will determine whether we meet the Nasdaq Capital Market initial listing criteria set forth in Marketplace Rule 4310(c), except for the bid price requirement, and if we do, we will be granted an additional 180 calendar day compliance period. Presently, we believe that we meet all of the initial listing criteria except for the minimum bid price requirement based on the closing price of our common stock on March 31, 2010. However, if the market value of shares of our common stock held by non-affiliates is below the initial listing criteria on June 8, 2010, we intend to submit an appeal to Nasdaq to allow us an extension of time to gain compliance. If we are not successful, and Nasdaq delists our common stock, it will likely trade on the OTC Bulletin Board.

Holders

According to the records of our transfer agent, as of March 19, 2010, there were approximately 1,624 holders of record of our common stock.

Dividends

We have never paid cash dividends on our common stock. We do not anticipate paying any cash dividends on our common stock in the foreseeable future.

Securities Authorized for Issuance Under Equity Compensation Plans

During 2009, we granted 471,033 shares of restricted common stock for executive compensation under our 2003 Flexible Stock Plan and DAC Stock Option Plan. We granted 498,581 options during 2009 under our equity compensation plans. As of December 31, 2009, the following shares of our common stock were authorized for issuance under our equity compensation plans:

Equity Compensation Plan Information

(c)

(a)

(b)

Number of securities

Number of securities

Weighted-average

remaining available for

to be issued

exercise price

future issuance under

upon exercise of

per share of

equity compensation plans

outstanding options,

outstanding options,

(excluding securities

Plan Category (1)

warrants and rights

warrants and rights

reflected in column (a))

Equity compensation plans approved by security holders

3,206,109

$

16.32

1,199,080

(2)

Equity compensation plans not approved by security holders (3)

296,874

11.33

—

Total

3,502,983

15.90

1,199,080

Recent Sales of Unregistered Securities / Recent Purchases of Securities

On January 11, 2010, we issued 205,479 shares of our restricted common stock to Randolph Geissler in connection with the payment of a settlement of an employment contract in the amount of $150,000 (based on the closing stock price of $0.73 per share on January 8, 2010). The securities were issued in a transaction exempt from registration under Section 4(2) of the Securities Act of 1933, as amended.

We did not repurchase any shares of our common stock during the year ended December 31, 2009.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Annual Report on Form 10-K contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, without limitation, statements about our market opportunities, our business and growth strategies, our projected revenue and expense levels, possible future consolidated results of operations, the adequacy of our available cash resources, our financing plans, our competitive position and the effects of competition and the projected growth of the industries in which we operate. This Annual Report on Form 10-K also contains forward-looking statements attributed to third parties relating to their estimates regarding the size of the future market for products and systems such as our products and systems, and the assumptions underlying such estimates. Forward-looking statements are only predictions based on our current expectations and projections, or those of third parties, about future events and involve risks and uncertainties.

Although we believe that the expectations reflected in the forward-looking statements contained in this Annual Report on Form 10-K are based upon reasonable assumptions, no assurance can be given that such expectations will be attained or that any deviations will not be material. In light of these risks, uncertainties and assumptions, the forward-looking statements, events and circumstances discussed in this Annual Report on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Important factors that could cause our actual results, level of performance or achievements to differ materially from those expressed or forecasted in, or implied by, the forward-looking statements we make in this Annual Report on Form 10-K are discussed under “Item 1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K and include:

	•		our growth strategies including, without limitation, our ability to deploy our products and services including Bio-Thermo™;
	•		anticipated trends in our business and demographics;
	•		the ability to hire and retain skilled personnel;
	•		relationships with and dependence on technological partners;
	•		our reliance on government contractors;
	•		uncertainties relating to customer plans and commitments;
	•		our future profitability and liquidity;
	•		our ability to maintain compliance with covenants under our credit facilities, including our ability to make principal and interest payments when due;
	•		our ability to obtain patents, enforce those patents, preserve trade secrets and operate without infringing on the proprietary rights of third parties;
	•		governmental export and import policies, global trade policies, worldwide political stability and economic growth;
	•		expectations about the outcome of litigation and asserted claims;
	•		regulatory, competitive or other economic influences;
	•		our ability to successfully mitigate the risks associated with foreign operations;
	•		our ability to successfully implement our business strategy;
	•		our expectation that we can achieve profitability in the future;
	•		our ability to fund our operations;
	•		borrowings under DSD Holding’s existing bank and credit facilities as well as Signature’s invoice discounting facility are payable on demand and/or the facilities could be terminated at any time without notice;
	•		our reliance on third-party dealers to successfully market and sell our products;
	•		our reliance on a single source of supply for our implantable microchip;
	•		we may become subject to costly product liability claims and claims that our products infringe the intellectual property rights of others;
	•		our ability to comply with current and future regulations relating to our businesses;

	•		the potential for patent infringement claims to be brought against us asserting that we hold no rights for the use of the implantable microchip technology and that we are violating another party’s intellectual property rights. If any such a claim is successful, we could be enjoined from engaging in activities to market the systems that utilize the implantable microchip and be required to pay substantial damages;
	•		our ability to comply with the obligations in our various registration rights agreements;
	•		the impact of new accounting pronouncements;
	•		our ability to establish and maintain proper and effective internal accounting and financial controls;
	•		our ability to maintain our listing on the Nasdaq Capital Market and the effect of a delisting;
	•		our ability to continue operations at the current level; and
	•		our actual results may differ materially from those reflected in forward-looking statements as a result of (i) the risk factors described under the heading “Risk Factors” beginning on page 12 of this Annual Report and in our other public filings, (ii) general economic, market or business conditions, (iii) the opportunities (or lack thereof) that may be presented to and pursued by us, (iv) competitive actions by other companies, (v) changes in laws, and (vi) other factors, many of which are beyond our control.

Forward-looking statements include all statements that are not historical facts and can be identified by forward-looking words such as “will likely result,” “are expected to,” “will continue,” “is anticipated,” “projects,” “target,” “goal,” “plans,” “objective,” “may,” “should,” “could,” “would,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “hopes,” and similar expressions intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties (including those described under “Risk Factors” in this Annual Report) that could cause actual results to differ materially from estimates or forecasts contained in the forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this Annual Report. Other than as required by law, we do not undertake any obligation to publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur or of which we hereafter become aware.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and related notes included in this Annual Report.

Overview

We currently engage in the following principal business activities:

	•		developing, manufacturing and marketing of visual and electronic identification tags and implantable RFID microchips, primarily for identification, tracking and location of companion pets, livestock (e.g., cattle and hogs), horses, fish and wildlife worldwide, and, more recently, for animal bio-sensing applications, such as temperature reading for companion pet and livestock applications; and
	•		developing, manufacturing and marketing global position systems (“GPS”) and GPS-enabled products used for emergency location and tracking of pilots, aircraft and maritime vehicles in remote locations as well as sound horn alarms.

Our discontinued operations presented in the accompanying consolidated financial statements consisted of the operations of four wholly-owned subsidiaries, Computer Equity Corporation (“Computer Equity”), Perimeter Acquisition Corp. (“Perimeter”), Florida Decision Corporation (“FDC,” formerly Pacific Decision Sciences Corporation) and ThermoLife Energy Corp. (“Thermo Life”), and two equity investments, IFTH Acquisition Corp. which is now part of PositiveID Corporation (“IFTH”) and PositiveID Corporation, formerly, VeriChip Corporation (“PSID”) (NASDAQ: PSID). Also included in discontinued operations are the operations of McMurdo Limited (“McMurdo”) which was sold by Signature, a subsidiary of our wholly-owned subsidiary Destron Fearing, on November 20, 2009. As of December 31, 2007, we owned a majority interest in PSID and IFTH. However, during the first quarter of 2008, our ownership percentages of both companies fell below 50%. Therefore, during the three-months ended March 31, 2008, we began accounting for PSID and IFTH under the equity method of accounting. All of our discontinued operations, excluding Thermo Life, have been sold as of December 31, 2008. Thermo Life was sold on January 21, 2010. Discontinued operations are more fully discussed in Note 14 to our consolidated financial statements.

Recent and other Significant Events Affecting Our Results of Operations and Financial Condition

Repayment of Existing Term Debt Obligations

On December 14, 2009, we paid $3.8 million of the existing term debt obligations to Laurus Master Fund Ltd. (“Laurus”) and Kallina Corporation (“Kallina”), of which $3.0 million was paid in cash (which included the November 2009 monthly payment) and $0.8 million was paid through the issuance of our common stock. After the prepayment, the balance of the existing debt obligations, which was approximately $1.4 million, was payable in full to the Lenders on or before the original maturity date of February 1, 2010. On February 1, 2010, the outstanding principal and interest due under the existing term debt obligations to Laurus and Kallina was paid in full.

Registered Direct Offering and Sale of Common Stock and Warrants

On February 9, 2010, we sold, in a registered direct offering, 3,385,000 shares of our common stock and warrants to purchase 1,354,000 shares of common stock to two institutional investors pursuant to the terms of a securities purchase agreement we entered into on February 3, 2010. The purchase price of the securities was $1.7 million in the aggregate. The exercise price of the warrants is $0.50 per share and the warrants may be immediately exercised and expire seven years from the date of issuance. The warrants are not exercisable by a holder to the extent that such holder or any of its affiliates would beneficially own in excess of 4.9% of our common stock. We entered into a placement agent agreement with Chardan Capital Markets, LLC (“Chardan”) relating to our registered direct offering where we agreed to pay Chardan a placement agent fee of 6.0% of the gross proceeds from the sale. The net proceeds from the sale, after deducting the placement agent fee and other offering expenses, were approximately $1.6 million and were used primarily to replenish the funds used for the repayment of existing term debt obligations as discussed above. The terms of the warrants are more fully described in Note 23 to our consolidated financial statements.

Termination of Standby Equity Distribution Agreement

On July 10, 2009, we entered into a Standby Equity Distribution Agreement (the “SEDA”) with YA Global Master SPV Ltd. (“YA SPV”), an affiliate of Yorkville Advisors, for the sale of up to $5.0 million of shares of our common stock over a two-year commitment period. Under the terms of the SEDA, we could from time to time, at our discretion, sell newly-issued shares of our common stock to YA SPV. We issued shares of our common stock under the SEDA pursuant to a Registration Statement on Form S-3 (Registration No. 333-159880), declared effective by the SEC on July 9, 2009 wherein we registered 3.0 million shares of our common stock.

The SEDA required payment of a commitment fee payable to YA SPV in an amount equal to $125,000. We delivered approximately 88 thousand shares of common stock under the Registration Statement to pay the commitment fee. The price of the shares delivered was the average of the daily VWAP for the three trading days after the date of the Agreement. During the year ended December 31, 2009, we issued approximately 2.9 million shares of our common stock and received approximately $2.8 million in cash under the SEDA. On January 19, 2010, we issued an additional 0.1 million shares of our common stock and received approximately $0.1 million in cash under the SEDA. On February 4, 2010, in connection with the registered direct offering discussed above, we terminated the SEDA.

Notice of Nasdaq Delisting

On December 10, 2009, we received a letter from the Nasdaq Stock Market (the “Nasdaq”) indicating that we are not in compliance with Nasdaq’s requirements for continued listing because, for the previous 30 consecutive business days, the bid price of our common stock closed below the minimum $1.00 per share price requirement for continued inclusion under Nasdaq Marketplace Rule 4310(c)(4) (the “Rule”). In accordance with the Nasdaq Marketplace Rules, we were provided 180 calendar days, or until June 8, 2010, to regain compliance with the Rule.

If, at any time before June 8, 2010, the bid price of our common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, the Nasdaq staff will provide us written notification that we are in compliance with the Rule. However, if we do not regain compliance with the Rule by June 8, 2010, the Nasdaq staff will determine whether we meet the Nasdaq Capital Market initial listing criteria set forth in Marketplace Rule 4310(c), except for the bid price requirement, and if we do, we will be granted an additional 180 calendar day compliance period. Since December 10, 2009, our stock has traded below $1.00. Presently, we believe that we meet all of the initial listing criteria except for the minimum bid price requirement, based on the closing price of our common stock on March 31, 2010. However, if the market value of shares of our common stock held by non-affiliates is below the initial listing criteria on June 8, 2010, we intend to submit an appeal to Nasdaq to allow us an extension of time to gain compliance. If we are not successful, and Nasdaq delists our common stock, it will likely trade on the OTC Bulletin Board.

Impact of Recently Issued Accounting Standards

For information regarding recent accounting pronouncements and their expected impact on our future consolidated results of operations or financial condition, see Note 1 to our consolidated financial statements.

Business Segment Overview

We operate in two business segments: Animal Identification and Emergency Identification.

Our Animal Identification segment’s revenue decreased to $30.8 million for the year ended December 31, 2009 compared to $38.5 million for the year ended December 31, 2008. The decrease in the Animal Identification segment’s revenue was primarily due to decreased sales of our syringe assemblies and electronic tags. For extended discussion, see the Animal Identification revenue discussion below. Our Animal Identification segment experienced a smaller operating loss in the year ended December 31, 2009 compared to 2008 and we expect this segment to achieve operating income in 2010. See page 28 for a discussion of our outlook and trends for our Animal Identification segment.

Our Emergency Identification segment’s revenue decreased to $18.7 million for the year ended December 31, 2009 compared to $23.8 million for the year ended December 31, 2008. The decrease in revenue was primarily due to exchange rate variances during 2009 compared to 2008. In local currency, revenues decreased by approximately £0.9 million, or 6.8%. Signature sales decreased at our Radio Communications and Clifford and Snell divisions, which were slightly offset by increased sales at our Sarbe division. Our Emergency Identification segment experienced operating losses for the years ended December 31, 2009 and 2008. We expect that our Emergency Identification segment will achieve operating income in 2010. See page 28 for a discussion of our outlook and trends for our Emergency Identification segment.

The tables below provide a percentage breakdown of the significant sources of our consolidated revenues and gross profits over the past two fiscal years and, as such, reflect certain trends in the composition of such revenues and gross profits:

		2009				2008
Sources of Revenue:
Visual and electronic identification tags and implantable microchips for companion pets, horses, livestock, fish and wildlife markets from our Animal Identification segment			62.2	%			61.8	%
GPS enabled products used for location tracking and message monitoring of pilots, aircraft and maritime vehicles in remote locations from our Emergency Identification segment			37.8				38.2
Total			100.0	%			100.0	%

		2009				2008
Sources of Gross Profit:
Visual and electronic identification tags and implantable microchips for companion pets, horses, livestock, fish and wildlife markets from our Animal Identification segment			52.5	%			41.9	%
GPS enabled products used for location tracking and message monitoring of pilots, aircraft and maritime vehicles in remote locations from our Emergency Identification segment			47.5				58.1
Total			100.0	%			100.0	%

The table below sets forth data from our consolidated statements of operations for the past two fiscal years, expressed as a percentage of total revenues from continuing operations:

		2009				2008
Revenue			100.0	%			100.0	%
Cost of sales			59.0				68.0
Gross profit			41.0				32.0
Selling, general and administrative expenses			49.8				48.8
Research and development expenses			2.4				3.2
Restructuring, severance and separation expenses			1.4				5.9
Goodwill and asset impairment charges			14.9				57.0
Total operating costs and expenses			68.5				114.9
Operating loss			(27.5	)			(82.9	)
Interest and other income (expense), net			0.6				4.3
Interest expense			(4.3	)			(17.5	)
Loss from continuing operations before income tax benefit			(31.2	)			(96.1	)
Benefit from income taxes			—				0.3
Loss from continuing operations			(31.2	)			(95.8	)
Income from discontinued operations, net of income taxes			6.1				2.6
Net loss			(25.1	)			(93.2	)
(Income) loss attributable to the noncontrolling interest, continuing operations			0.2				(0.2	)
(Income) loss attributable to the noncontrolling interest, discontinued operations			(0.1	)			—
Net loss attributable to Digital Angel Corporation			(25.0	)%			(93.4	)%

Our consolidated operating activities (used) provided cash of $(3.9) million and $1.3 million during the years ended December 31, 2009 and 2008, respectively. As of December 31, 2009, our cash and cash equivalents totaled $1.9 million, compared to $1.4 million as of December 31, 2008. As of December 31, 2009, our stockholders’ equity was $15.9 million, as compared to $22.7 million as of December 31, 2008, and as of December 31, 2009, we had an accumulated deficit of $571.2 million. Our consolidated operating loss was approximately $13.6 million and $51.6 million for the years ending December 31, 2009 and 2008, respectively. The decrease in our 2009 operating loss was due, in large part, to approximately $35.5 million of goodwill and asset impairments, $3.7 million of restructuring expenses, $1.4 million of inventory reserves related to our restructuring efforts that were recorded in 2008 as well as an overall reduction in selling, general and administrative expenses in 2009.

Our profitability and liquidity depend on many factors, including the success of our marketing programs, the maintenance and reduction of expenses, our ability to successfully develop and bring to market our new products and technologies and the protection of our intellectual property rights. We have established a management plan intended to guide us in achieving profitability in future periods. The major components of our plan are as follows:

	•		To streamline our segments’ operations and improve our supply chain management;
	•		To streamline and consolidate our corporate structure and minimize overhead costs;
	•		To divest of non-core assets and businesses;
	•		To attempt to produce additional cash flow and revenue from our technology products;
	•		To transition portions of our in-house manufacturing to lower-cost countries;
	•		To instill a pay for performance culture; and
	•		To seek growth through strategic acquisitions or partnerships.

Our management believes that the above plan can be effectively implemented.

Critical Accounting Policies and Estimates

Listed below are descriptions of the accounting policies that our management believes involve a high degree of judgment and complexity, and that, in turn, could materially affect our consolidated financial statements if various estimates and assumptions were changed significantly. The preparation of our consolidated financial statements requires that we make certain estimates and judgments that affect the amounts reported and disclosed in our consolidated financial statements and related notes. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. For more detailed information on our significant accounting policies, see Note 1 to our consolidated financial statements.

Revenue Recognition

Our revenue recognition policies, which are listed in Note 1 to our consolidated financial statements, determine the timing and recognition of certain expenses, such as sales commissions. We follow specific and detailed guidelines in measuring revenue; however, certain judgments affect the application of our revenue policy. The complexity of the estimation process and all issues related to the assumptions, risks and uncertainties inherent with our revenue recognition policies affect the amounts reported in our financial statements. A number of internal and external factors affect the timing of our revenue recognition, including estimates of customer service/warranty periods, estimates of customer returns and the timing of customer acceptance. Our revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter and year to year.

Goodwill and Other Intangible Assets

As of December 31, 2009, our consolidated goodwill was $3.3 million and our intangible assets were $11.4 million. We had no intangible assets with indefinite lives. We test our goodwill and intangible assets for impairment annually as a part of our annual business planning cycle during the fourth quarter of each fiscal year or earlier depending on specific changes in conditions surrounding our business units. The determination of the value of our intangible assets requires management to make estimates and assumptions about the future operating results of our operating units. In the fourth quarter of 2009, we recorded an impairment charge of approximately $7.1 million related to our Emergency Identification reporting unit; $3.8 million relating to goodwill and $3.3 million (net of approximately $(1.4) million of related deferred tax liabilities) related to intangible assets. As a result of the declines in our equity market capitalization, which fell below our stockholders’ equity, we performed an interim goodwill assessment in the third quarter of 2008. This assessment resulted in a $25.0 million goodwill impairment charge in the quarter. In performing our impairment assessments in 2009 and 2008, we placed emphasis on current trading values, including those of our competitors, as well as higher market-risk discount rates. In the fourth quarter of 2008, we recorded approximately $4.4 million of impairment charges relating to our Animal Identification segment of which $4.1 million was related to goodwill and $0.3 million was related to trademarks and customer relationships. Future events, such as market conditions or operational performance of our businesses, could cause us to conclude that additional impairment exists, which could have a material impact on our financial condition and results of operations.

Principles of Consolidation

We consolidate all subsidiaries in which we hold a greater than 50% voting interest, which requires that we include the revenue, expenses, assets and liabilities of such subsidiaries in our financial statements. Currently, we own a majority of each of our subsidiaries. However, if in the future we were to own less than 50% but equal to or more than 20% of the voting interest of any investee, we will account for such investee under the equity method. All intercompany transactions and balances between or among us and our subsidiaries have been eliminated in consolidation.

Stock-Based Compensation

In accordance with the Compensation — Stock Compensation Topic of the Codification, stock-based awards granted are valued at fair value and compensation cost is recognized on a straight line basis over the service period of each award. See Note 11 for further information concerning our stock option plans.

In the years ended December 31, 2009 and 2008, we incurred stock-based compensation expense of approximately $0.5 million and $0.4 million, respectively. This stock-based compensation expense is reflected in our consolidated statements of operations in selling, general and administrative expense.

Inventory Obsolescence

Estimates are used in determining the likelihood that inventory on hand can be sold. Historical inventory usage and current revenue trends are considered in estimating both obsolescence and slow-moving inventory. Inventory is stated at lower of cost (determined by the first-in, first-out method) or market, net of any reserve for obsolete or slow-moving inventory. As of December 31, 2009 and 2008, inventory reserves were $2.2 million and $1.3 million, respectively. The estimated market value of our inventory is based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required, which could have a material adverse affect on our financial condition and results of operations.

Accounting for Income Taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate our income tax liability in each of the jurisdictions in which we do business. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items, such as deferred revenues, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that our net deferred tax assets in each tax jurisdiction will be recovered from future taxable income in the applicable jurisdiction and, to the extent we believe that recovery is not more likely than not or is unknown, we must establish a valuation allowance.

Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against the deferred tax assets. As of December 31, 2009 and 2008, we had recorded a full valuation allowance against our U.S. net deferred tax assets due to uncertainties related to our ability to utilize these deferred tax assets, primarily consisting of net operating losses carried forward. The valuation allowance is based on our historical operating performance and estimates of taxable income in the U.S. and the period over which our deferred tax assets will be recoverable. As of December 31, 2009, we have not provided a valuation allowance against certain of our United Kingdom deferred tax assets as we have deemed it more likely than not that these assets will be realized.

If we continue to operate at a loss or are unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we may be required to increase our valuation allowance against previously recognized deferred tax assets, which could result in a material adverse impact on our operating results. Conversely, if we become profitable in the future or if we realize certain built-in-gains, we may reduce a significant portion of our valuation allowance, which could result in a significant tax benefit and a favorable impact on our financial condition and operating results. As of December 31, 2009, we had an aggregate valuation allowance against our net deferred tax assets of approximately $116.4 million.

The amount of any benefit from our US tax net operating losses is dependent on: (1) our ability to generate future taxable income and (2) the unexpired amount of net operating loss carryforwards available to offset amounts payable on such taxable income. Any greater than a fifty percent change in ownership under IRC section 382 places significant annual limitations on the use of such net operating losses to offset any future taxable income we may generate. Such limitations, in conjunction with the net operating loss expiration provisions, effectively eliminates our ability to use a substantial portion of our net operating loss carryforwards to offset future taxable income. Based on our current cumulative three-year change in ownership, we exceeded the fifty percent threshold during the year ended December 31, 2009. As a result, approximately $197.9 million of the U.S. net operating loss carryforwards is limited under IRC section 382. Certain transactions could cause an additional ownership change in the future, including (a) additional issuances of shares of common stock by us or our subsidiaries or (b) acquisitions or sales of shares by certain holders of our shares, including persons who have held, currently hold, or accumulate in the future five percent or more of our outstanding stock. See Note 13 for further information concerning our income taxes.

Results of Operations from Continuing Operations

We evaluate the performance of our two operating segments based on stand-alone segment operating loss, as presented below. Operating loss from each of our segments during 2009 and 2008 was as follows:

		For the years ended December 31,
		2009				2008
		(in thousands)
Animal Identification		$	(757	)		$	(41,716	)
Emergency Identification			(9,207	)			(1,257	)
Corporate (1)			(3,626	)			(8,662	)
Total		$	(13,590	)		$	(51,635	)

Animal Identification Segment

Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008

						% of								% of				Change
		2009				Revenue				2008				Revenue				Increase (Decrease)
		(dollar amounts in thousands)
Revenue		$	30,774				100.0	%		$	38,501				100.0	%		$	(7,727	)			(20.1	)%
Gross profit			10,635				34.5				8,355				21.7				2,280				27.3
Selling, general and administrative expenses			9,492				30.8				11,550				30.0				(2,058	)			(17.8	)
Research and development expenses			1,206				3.9				1,993				5.2				(787	)			(39.5	)
Restructuring, severance and separation expenses			497				1.6				2,357				6.1				(1,860	)			(78.9	)
Goodwill and asset impairment charges			197				0.6				34,171				87.2				(33,974	)			(99.4	)
Operating loss		$	(757	)			(2.4	)%		$	(41,716	)		NM		%		$	40,959				98.2

Revenue — Our Animal Identification segment’s revenue decreased approximately $7.7 million, or 20.1%, in the year ended December 31, 2009 as compared to the year ended December 31, 2008. The decrease was primarily due to a decrease in demand for companion animal sales resulting in approximately 1.4 million less syringe assemblies sold to Schering Plough, our exclusive distributor in the U.S. of our companion pet implantable microchips. In addition, we experienced lower electronic tag sales due to the fulfillment of a contract with the U.S. Department of Agriculture in the first quarter of 2008, decreased electronic tag sales in Canada during the fourth quarter of 2009 compared to the fourth quarter of 2008 and fewer sales in Europe primarily due to a lower volume of sales to Austria and a negative exchange rate impact from the prior year. These decreases were slightly offset by an increase in sales of fish chips due to an increase in government demand.

Gross Profit and Gross Profit Margin — Our Animal Identification segment’s gross profit increased approximately $2.3 million, or 27.3%, in the year ended December 31, 2009 compared to the year ended December 31, 2008. The increase primarily relates to a lower gross profit margin in 2008 resulting from an inventory provision recorded in 2008 of approximately $1.8 million related to slow moving and obsolete inventory and inventory identified as a result of our restructuring activities in 2008 as well as headcount reductions and a reduction in material and freight expenses. The gross profit margin was 34.5% in the year ended December 31, 2009 compared to 21.7% in the year ended December 31, 2008. We primarily attribute the increase in gross profit margin to the causes discussed above.

Selling, General and Administrative Expenses — Our Animal Identification segment’s selling, general and administrative expenses decreased approximately $2.1 million, or 17.8% in the year ended December 31, 2009 compared to the year ended December 31, 2008. This was primarily attributable to lower sales and marketing costs due to less media and advertising expenses as a result of our cost control efforts, reduced salaries from headcount reductions resulting from our restructuring efforts in 2008 as well as decreased legal costs associated with intellectual property compliance. Selling, general and administrative expenses as a percentage of revenue remained relatively constant during the years ended December 31, 2009 and 2008.

Research and Development Expenses — Our Animal Identification segment’s research and development expenses decreased approximately $0.8 million in the year ended December 31, 2009 compared to the year ended December 31, 2008. The decrease was primarily due to a reduction of costs associated with the rTag^TM development and decreased salary and benefits expenses due to headcount reductions as a result of our restructuring efforts. Research and development expenses relate to new product development associated with RFID microchips and related scanners.

Restructuring, Severance and Separation Expenses — Our Animal Identification segment’s restructuring, severance and separation expenses were approximately $0.5 million and $2.4 million in the years ended December 31, 2009 and 2008, respectively. The costs in both 2009 and 2008 primarily related to severance and facilities and production relocation costs at the St. Paul, Denmark and South American locations.

Goodwill and Asset Impairment Charges — Our Animal Identification segment recorded goodwill and asset impairment charges of $0.2 million and $34.2 million for the years ended December 31, 2009 and 2008, respectively. The goodwill and asset impairment charges in 2009 related to fixed asset impairments at the St. Paul location. In 2008, as a result of the declines in our equity market capitalization, which fell below our stockholders’ equity, we performed an interim goodwill assessment in the third quarter of 2008. This assessment resulted in a $25.0 million goodwill impairment charge in the quarter. In performing our assessments, we placed greater emphasis on current trading values, including those of our competitors, as well as higher market-risk discount rates. In addition, during our annual impairment review in the fourth quarter of 2008, we recorded goodwill impairment of approximately $4.1 million related to Geissler Technologies Corporation (“GTC”) and recorded an impairment of intangibles at South America of approximately $0.3 million. The remaining impairment in 2008 related to our restructuring and is due to: (i) fixed asset impairments of $1.8 million ($0.4 million in St. Paul and $1.4 million in Denmark); (ii) goodwill impairment in Denmark of $1.9 million; (iii) intangible asset impairments of $0.8 million in Denmark; and (iv) other asset impairments of $0.2 million. If in the future we fail to perform as expected, we could face additional goodwill and intangible asset impairment charges.

Outlook and Trends

We anticipate our Animal Identification segment’s sales and gross profits to remain relatively constant in 2010 and our operating expenses to decrease slightly in 2010. We believe our investment in technology and product development, such as the rTag™ and BioThermo^®, will enable future growth for our Animal Identification segment. We also face favorable long-term market trends, such as the technology migration from visual to electronic identification and increased government regulation in the area of food safety and traceability.

Emergency Identification Segment

Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008

						% of								% of				Change
		2009				Revenue				2008				Revenue				Increase (Decrease)
		(dollar amounts in thousands)
Revenue		$	18,689				100.0	%		$	23,759				100.0	%		$	(5,070	)			(21.3	)%
Gross profit			9,636				51.6				11,563				48.7				(1,927	)			(16.7	)
Selling, general and administrative expenses			11,520				61.6				12,224				54.5				(704	)			(5.8	)
Restructuring, severance and separation expenses			181				1.0				596				2.5				(415	)			(69.6	)
Goodwill and asset impairment			7,142				38.3				—				—				7,142			NM
Operating loss		$	(9,207	)			(49.3	)%		$	(1,257	)			(5.3	)%		$	(7,950	)		NM

Revenue — Our Emergency Identification segment’s revenue decreased approximately $5.1 million, or 21.3%, in the year ended December 31, 2009 compared to the year ended December 31, 2008. The decrease in revenue is primarily due to exchange rate variances during 2009 compared to 2008. In local currency, revenues decreased by approximately £0.9 million, or 6.8%. Signature sales decreased at our Radio Communications and Clifford and Snell divisions, which were slightly offset by increased sales at our Sarbe division.

Gross Profit and Gross Profit Margin — Our Emergency Identification segment’s gross profit decreased approximately $1.9 million, or 16.7%, in the year ended December 31, 2009 as compared to the year ended December 31, 2008. The decrease was primarily attributable to exchange rate variances during 2009 compared to 2008. In local currency, gross profit remained relatively constant. Gross profit margin was 51.6% in the year ended December 31, 2009 as compared to 48.7% during the year ended December 31, 2008. The increase in gross profit margin relates primarily to improved margins at our Sarbe division.

Selling, General and Administrative Expenses — Our Emergency Identification segment’s selling, general and administrative expenses decreased approximately $0.7 million, or 5.8%, in the year ended December 31, 2009 compared to the year ended December 31, 2008. This decrease in selling, general and administrative expenses is primarily due to exchange rate variances during 2009 and 2008. In local currency, selling, general and administrative expenses increased approximately £0.7 million. The increase relates primarily to an increase in legal and accounting fees due to the implementation in 2009 of an allocation of such expenses from our corporate division, an increase in temporary staffing costs and depreciation, as well as an executive compensation and travel cost allocation from our corporate division in the fourth quarter of 2009. These increases were slightly offset by decreases in other personnel costs. As a percentage of revenue, selling, general and administrative expenses increased to 61.6% in the year ended December 31, 2009 from 54.5% in the year ended December 31, 2008. The increase in selling, general and administrative expenses as a percentage of revenue resulted primarily from the factors discussed above.

Restructuring, Severance and Separation Expenses — Our Emergency Identification segment’s restructuring, severance and separation expenses were approximately $0.2 million in the year ended December 31, 2009 and $0.6 million in the year ended December 31, 2008 and primarily related to severance at our U.K. locations as we continue our efforts to reduce expenses and streamline operations.

Goodwill and Asset Impairment — Our Emergency Identification segment’s goodwill and asset impairment expense of approximately $7.1 million during the year ended December 31, 2009 related to impairments of approximately $3.8 million of goodwill and approximately $3.3 million (net of approximately $(1.4) million of related deferred tax liabilities) related to intangible assets. The impairments were recorded as a result of our annual testing during the fourth quarter of 2009.

Outlook and Trends

We anticipate our Emergency Identification segment’s sales and gross profits to increase and our operating expenses to decrease in 2010. We believe that the future will bring market opportunities due to increasing demand for recreational PLBs, expansion into the North American market and our belief that PLBs will become a highly desired product during peacetime for many of our current, and potentially new, world wide armed forces customers.

Corporate Segment

Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008

										Change
		2009				2008				Increase (Decrease)
		(dollar amounts in thousands)
Revenue		$	—			$	—			$	—				—	%
Gross profit			—				—				—				—
Selling, general and administrative expenses			3,626				6,641				(3,015	)			(45.4	)
Restructuring expenses			—				725				(725	)			(100.0	)
Goodwill and asset impairment charges			—				1,296				(1,296	)			(100.0	)
Operating loss		$	(3,626	)		$	(8,662	)		$	5,036				40.4

Selling, General and Administrative Expenses — Our Corporate segment’s selling, general and administrative expenses decreased approximately $3.0 million in 2009 as compared to 2008. The decrease primarily relates to lower salary expenses resulting from fewer Corporate employees in 2009, the implementation of the allocation of executive management compensation and audit, accounting and legal expenses to our Animal Identification and Emergency Identification segments, a reduction in accrued bonuses, and decreased outside professional fees.

Restructuring Expenses — Our Corporate segment’s restructuring expense in 2008 consisted of approximately $0.4 million related to accrued severance and stay bonuses and related payroll expenses, and approximately $0.3 million related to accrued rent expense for our corporate office in Florida. As a part of the restructuring plan, we eliminated approximately five headcount in 2008 and we closed our offices in Delray Beach, Florida in September 2008.

Goodwill and Asset Impairment Charges — Our Corporate segment’s impairment charges of approximately $1.3 million for the year ended December 31, 2008 was due to $1.2 million impairment of our investment in PSID and the write off of assets in connection with the closing of our corporate offices in Florida.

Consolidated

Interest and Other Income, net

Interest and other income, net decreased approximately $2.4 million in the year ended December 31, 2009 compared to the year ended December 31, 2008. The decrease was primarily the result of $3.2 million of income recognized in 2008 from the reversal of liabilities of companies that were sold or closed in 2001 and 2002, and for which we no longer had a legal obligation to pay, $0.7 million of gain on sale of patents in 2008 and approximately $0.5 million of interest income recognized on investments. These increases in 2008 were partially offset by a loss on settlement of PSID’s debt to us of $2.5 million.

Interest Expense

Interest expense was $2.2 million and $10.9 million for the years ended December 31, 2009 and 2008, respectively. The decrease in interest expense from 2008 is primarily due to approximately $2.0 million of additional amortization of debt issuance costs and discount on original debt issued as the result of prepayments of debt during 2008, approximately $1.5 million write-off of the remaining debt issuance costs and discount on original debt issued and debt modification expense as a result of the substantial modification of debt during 2008, an additional $1.1 million of interest expense associated with the re-pricing of common stock warrants during 2008 and an additional $0.5 million of interest expense related to the issuance of stock in connection with a $2.0 million note entered into during the fourth quarter of 2008. Interest expense in 2009 primarily relates to interest incurred on our outstanding debt as well as $0.5 million of interest expense related to Destron Fearing’s amortization of debt discount and debt issuance costs. Based on our current level of debt we estimate that our interest expense will be approximately $1 million for the year ended December 31, 2010.

Total cash paid for interest was approximately $1.5 million and $2.1 million, or 68% and 19% of total interest expense, for the years ended December 31, 2009 and 2008, respectively.

Income Taxes

Differences in the effective income tax rates from the statutory federal income tax rate arise from state taxes net of federal benefits, the increase or reduction of valuation allowances related to net operating loss carry forwards and other deferred tax assets. As of December 31, 2009, we have provided a valuation allowance to fully reserve our U.S. net operating losses carried forward and our other U.S. existing net deferred tax assets, primarily as a result of our recent losses. Our tax provisions for 2009 and 2008 were primarily related to our foreign operations.

Net Loss from Continuing Operations

During the years ended December 31, 2009 and 2008, we reported a loss from continuing operations of approximately $15.4 million and $59.6 million, respectively. The decrease in the loss for the year ended December 31, 2009 compared to December 31, 2008 principally relates to higher goodwill and assets impairment charges, additional non-cash interest expense and additional restructuring expenses and severance charges, in the year ended December 31, 2008 as compared to the amounts incurred during 2009. Also contributing to the reduction in the loss from continuing operations in 2009 was a reduction in selling, general and administrative expenses of approximately $5.8 million. Each of these items is more fully discussed above in the context of the appropriate segment.

LIQUIDITY AND CAPITAL RESOURCES FROM CONTINUING OPERATIONS

As of December 31, 2009, cash and cash equivalents totaled $1.9 million, an increase of $0.5 million, or 35.7%, from $1.4 million at December 31, 2008.

Net cash (used in) provided by operating activities totaled $(3.9) million and $1.3 million in 2009 and 2008, respectively. In 2009, cash used by operating activities was primarily the net loss and the net change in operating assets and liabilities. In 2008, cash was provided primarily by the net change in operating assets and liabilities.

Adjustments to reconcile operating losses to net cash used in operating activities included the following:

	•		Accounts and unbilled receivables, net of allowance for doubtful accounts, were $7.4 million and $8.9 million at December 31, 2009 and 2008, respectively. The decrease is primarily due to lower companion animal and electronic tag sales during the fourth quarter of 2009 compared to the fourth quarter of 2008. We anticipate accounts receivable to decrease slightly during 2010.
	•		Inventories increased to $9.8 million at December 31, 2009, compared to $7.1 million at December 31, 2008. The increase was primarily due to our Emergency Identification segment which continued to build inventory levels during 2009 in preparation for production on a large PELS contract. The increase is slightly offset by a decrease in inventory at our Animal Identification segment due to a reduction of transponders. We expect inventory levels to decrease in 2010 as we fulfill the PELS contract.
	•		Accounts payable decreased $0.3 million to $8.1 million at December 31, 2009, from $8.4 million at December 31, 2008. The decrease was primarily due to our Emergency Identification segment resulting from fewer purchases in the fourth quarter of 2009. The decrease was slightly offset by an increase in accounts payable at our Animal Identification segment due to the general timing of billings and payments of purchases. We anticipate accounts payable levels to decrease throughout 2010.
	•		Accrued expenses decreased $1.2 million to $6.6 million at December 31, 2009, from $7.7 million at December 31, 2008. The decrease was primarily related to the reclassification of certain bonuses to long-term liabilities based on our plans and expectations of the timing of the payments as well as payments of accrued severance at our Emergency Identification segment during 2009. We expect accrued expenses to increase in 2010.

Investing activities provided cash of $8.1 million and $13.3 million in 2009 and 2008, respectively. In 2009, cash provided by investing activities was primarily related to the sale of McMurdo. In 2008, cash provided by investing activities was primarily related to proceeds of approximately $9.5 million received on a note receivable from PSID and approximately $7.2 million received from PSID as a special dividend, offset slightly by payments on a note receivable and purchases of equipment.

Financing activities (used) cash of $(3.8) million and $(15.0) million in 2009 and 2008, respectively. In 2009, we paid a total of approximately $6.6 million on our debt which was slightly offset by the cash received from the issuance of shares of our common stock under the SEDA. In 2008, we made net payments on our debt of approximately $16.3 million which was offset slightly by approximately $2.3 million in proceeds from warrant exercises.

Financial Condition

Financing Agreements and Debt Obligations

We are party to certain financing agreements and debt obligations, which total approximately $9.7 million as of December 31, 2009, and are discussed in detail in Note 9 to our consolidated financial statements. The following is a discussion of our liquidity, and therefore, focuses on our revolving debt and advances from factors which represent approximately $5.1 million and $1.3, respectively. We do not have any financial covenants under any of our debt agreements. For discussion of our non-financial covenants and outstanding debt, see Note 9 to our consolidated financial statements.

Destron Fearing’s Revolving Facility

On August 31, 2007, Destron Fearing and certain of its wholly-owned subsidiaries, Digital Angel Technology Corporation, Fearing Manufacturing Co., Inc. and Digital Angel International (collectively, the “Eligible Subsidiaries”) entered into a $6.0 million revolving asset-based financing transaction with Kallina pursuant to the terms of a Security Agreement. Under the terms of the Security Agreement, Destron Fearing may borrow, from time to time, an amount equal to the lesser of the amount of availability under the borrowing base and $6.0 million, subject to certain reserves that Kallina is authorized to take in its reasonable commercial judgment (the “Revolving Facility”). The borrowing base is calculated as a percentage of the total amount of eligible accounts receivable and inventory owned by Destron Fearing and its Eligible Subsidiaries. Amounts outstanding under the Revolving Facility accrue interest at a rate equal to the prime rate plus 2.0%, but not less than 10.0% at any time. At December 31, 2009, approximately $2.2 million was outstanding under the Revolving Facility, there was $0.3 million available for borrowing and the interest rate was 10.0%.

The Revolving Facility matures on August 31, 2010. Destron Fearing and its Eligible Subsidiaries have pledged all of their respective assets, excluding the stock of all foreign subsidiaries other than Signature, in support of the obligations under the Revolving Facility. In connection with the Revolving Facility, Destron Fearing issued to Kallina seven-year warrants, which, as a result of our acquisition of the minority owners’ interest in Destron Fearing in 2007, were converted into warrants to purchase shares of our common stock. The value of the warrants of approximately $1.0 million was recorded as a discount to the Revolving Facility and is being amortized to interest expense over the life of the Revolving Facility. Destron Fearing paid Kallina an upfront fee equal to 3.5% of the $6.0 million Revolving Facility, which is also being amortized over the life of the Revolving Facility as interest expense.

Signature’s Invoice Discounting Factoring Agreements

Signature had an Invoice Discounting Agreement, (as amended, the “RBS Invoice Discounting Agreement”) with The Royal Bank of Scotland Commercial Services Limited (“RBS”). The RBS Invoice Discounting Agreement provided for Signature to sell with full title guarantee most of its receivables, as defined in the RBS Invoice Discounting Agreement. Under the RBS Invoice Discounting Agreement, as amended in December 2008, RBS prepaid up to 70% of the receivables sold in the United Kingdom (“U.K.”) and up to 70% of the receivables sold in the rest of the world, not to exceed an outstanding balance of £1.5 million at any given time, subject to restrictions on the use of proceeds. RBS paid Signature the remainder of the receivable upon collection. Receivables which remained outstanding 90 days from the end of the invoice month became ineligible and RBS could require Signature to repurchase the receivable. The discounting charge accrued at an annual rate of 1.5% above the base rate as defined in the RBS Invoice Discounting Agreement. Signature paid a commission charge to RBS of 0.16% of each receivable balance sold. The RBS Invoice Discounting Agreement required a minimum commission charge of £833 per month. Discounting charges of $35 thousand and $0.1 million are included in interest expense for the years ended December 31, 2009 and 2008, respectively. In July 2009, we terminated the RBS Invoice Discounting Agreement and replaced it with the Bibby Invoice Discounting Agreement as discussed below.

In July 2009, Signature entered into an invoice discounting factoring agreement (the “Bibby Invoice Discounting Agreement”) with Bibby Financial Services (“Bibby”), which replaced the RBS Invoice Discounting Agreement as discussed above. The Bibby Invoice Discounting Agreement provides for Signature to sell, with full title guarantee, certain of its receivables as defined in the Bibby Invoice Discounting Agreement. Bibby prepays 80% of the receivables sold in the U.K. and 70% of receivables sold in the rest of the world, not to exceed a balance of £2.5 million (approximately $4.0 million at December 31, 2009). Subsequent to continued satisfactory operation of the invoice discounting facility and Signature’s financial progress, Bibby will increase funding in two further tranches of £500 thousand each (approximately $0.8 million at December 31, 2009), up to a total balance of £3.5 million (approximately $5.6 million at December 31, 2009), based upon the cash needs of the business and ability to generate the required level of receivable funding. Bibby repays Signature the remainder of the receivable upon collection.

Receivables which remain outstanding 90 days from the invoice date become ineligible and Signature is required to repurchase the receivable. The Bibby Invoice Discounting Agreement requires a fee of 0.25% for each U.K. receivable sold and 0.3% for each receivable sold in the rest of the world. If the total of the yearly fee is less than £60,000, Signature is required to pay Bibby the amount of such deficit. Signature is also required to pay a discounting charge of 2.0% above the higher of Barclays Bank Plc base rate or 3 month LIBOR subject to a minimum of 3.5% (3.5% at December 31, 2009). Discounting charges of approximately $0.1 million are included in interest expense for the year ended December 31, 2009. Either Signature or Bibby can terminate the Bibby Invoice Discounting Agreement by providing written notice to the other party six months prior to the intended termination date but neither party can terminate for eighteen months following the commencement date. As of December 31, 2009, we had approximately £0.4 million outstanding (approximately $0.6 million) and approximately £0.3 million available (approximately $0.5 million) for borrowing under the Bibby Invoice Discounting Agreement.

Destron Fearing A/S’s Line of Credit

Destron Fearing A/S is party to a credit agreement with Danske Bank (the “Credit Facility”). On June 1, 2006, Destron Fearing A/S amended the borrowing availability from DKK 12.0 million to DKK 18.0 million (approximately $3.5 million at December 31, 2009). In connection with the amendment, Destron Fearing executed a Letter of Support which confirms that it will maintain its holding of 100% of the share capital of Destron Fearing A/S, and will neither sell, nor pledge, nor in any way dispose of any part of Destron Fearing A/S or otherwise reduce Destron Fearing’s influence on Destron Fearing A/S without the prior consent of Danske Bank. Interest is determined quarterly and is based on the international rates Danske Bank can establish on a loan in the same currency on the international market plus 2.0%. At December 31, 2009, the annual interest rate on the Credit Facility was 6.6%. Borrowing availability under the Credit Facility considers guarantees outstanding. The Credit Facility will remain effective until further notice. Destron Fearing A/S can terminate the Credit Facility and pay the outstanding balance, or Danske Bank may demand the credit line be settled immediately at any given time, without prior notice. Beginning in July 2009, Destron Fearing A/S and Danske Bank agreed to reduce the borrowing availability on the Credit Facility each month by DKK 500 thousand (approximately $0.1 million). As of December 31, 2009, total availability had been reduced from DKK 18.0 million (approximately $3.5 million at December 31, 2009) to DKK 15.0 million (approximately $2.9 million at December 31, 2009). DKK 15.2 million (approximately $2.9 million) was outstanding at December 31, 2009 and there was no availability under the credit line.

Nordisk Factoring Agreement

In March 2008, our wholly-owned European subsidiary, Destron Fearing A/S, entered into a factoring agreement (the “Nordisk Factoring Agreement”) with Nordisk Factoring A/S (“Nordisk”). Under the Nordisk Factoring Agreement, Nordisk advances 80% of Destron Fearing A/S’s eligible receivables, not to exceed a balance of DKK 6.0 million (approximately $1.2 million at December 31, 2009) at any given time. As security, Destron Fearing A/S assigns all invoice balances to Nordisk, regardless of whether advances were made on them, and warrants payments by its customers. Destron Fearing A/S pays a factoring commission charge to Nordisk of 0.15% of the gross volume of receivables factored. The Nordisk Factoring Agreement requires a minimum commission charge of DKK 36,000 (approximately $7 thousand) per year. Discounting charges of approximately $34 thousand and $31 thousand are included in interest expense for the years ended December 31, 2009 and 2008, respectively. As of December 31, 2009, Destron Fearing A/S had assigned approximately DKK 3.5 million receivables (approximately $0.7 million) to Nordisk and had no additional availability under the agreement.

Registered Direct Offering and Sale of Common Stock and Warrants

On February 9, 2010, we sold, in a registered direct offering, 3,385,000 shares of our common stock and warrants to purchase 1,354,000 shares of common stock to two institutional investors pursuant to the terms of a securities purchase agreement we entered into on February 3, 2010. The purchase price of the securities was $1.7 million in the aggregate. The exercise price of the warrants is $0.50 per share and the warrants may be immediately exercised and expire seven years from the date of issuance. The warrants are not exercisable by a holder to the extent that such holder or any of its affiliates would beneficially own in excess of 4.9% of our common stock. We entered into a placement agent agreement with Chardan Capital Markets, LLC (“Chardan”) relating to our registered direct offering where we agreed to pay Chardan a placement agent fee of 6.0% of the gross proceeds from the sale. The net proceeds from the sale, after deducting the placement agent fee and other offering expenses, were approximately $1.6 million and were used primarily to cover the repayment of existing term debt obligations as discussed above. The terms of the warrants are more fully described in Note 23 to our consolidated financial statements.

Standby Equity Distribution Agreement

On July 10, 2009, we entered into a Standby Equity Distribution Agreement (the “SEDA”) with YA Global Master SPV Ltd. (“YA SPV”), an affiliate of Yorkville Advisors, for the sale of up to $5.0 million of shares of our common stock over a two-year commitment period. Under the terms of the SEDA, we could from time to time, at our discretion, sell newly-issued shares of our common stock to YA SPV. We issued shares of our common stock under the SEDA pursuant to a Registration Statement on Form S-3 (Registration No. 333-159880), declared effective by the SEC on July 9, 2009 wherein we registered 3.0 million shares of our common stock.

The SEDA required payment of a commitment fee payable to YA SPV in an amount equal to $125,000. We delivered approximately 88 thousand shares of common stock under the Registration Statement to pay the commitment fee. The price of the shares delivered was the average of the daily VWAP for the three trading days after the date of the Agreement. During the year ended December 31, 2009, we issued approximately 2.9 million shares of our common stock and received approximately $2.8 million in cash under the SEDA. On January 19, 2010, we issued an additional 0.1 million shares of our common stock and received approximately $0.1 million in cash under the SEDA. In connection with the registered direct offering, we terminated the SEDA effective February 4, 2010.

Liquidity

As of March 19, 2010, our consolidated cash and cash equivalents totaled approximately $2.2 million. In addition, we had an aggregate of $0.7 million available under our credit facilities.

Although we had negative working capital at December 31, 2009, we believe that we will be able to generate enough cash from operations, our existing revolving credit facility and factoring lines, the sales of certain business units and through other investing and financing sources, as well as our ability to delay certain bonus payments to senior management until funds are available and to undertake other cash management initiatives to operate our business for the twelve months ending December 31, 2010. Our goal is to achieve profitability and to generate positive cash flows from operations. In addition, during 2008 we restructured our Animal Identification business which eliminated redundancies, improved gross margins and decreased expenses. Also, we generated positive cash flows from operations during the year ended December 31, 2008. Our capital requirements depend on a variety of factors, including but not limited to, the rate of increase or decrease in our existing business base, the success, timing, and amount of investment required to bring new products on-line, revenue growth or decline, and potential acquisitions or divestitures. We have established a management plan to guide us in achieving profitability and positive cash flows from operations during 2010. No assurance can be given that we will be successful in implementing the plan. Failure to generate positive cash flow from operations might require us to substantially reduce our level of operations and will have a material adverse effect on our business, financial condition and results of operations.

Our historical sources of liquidity have included proceeds from the sale of common stock and preferred shares, proceeds from the issuance of debt, proceeds from the sale of businesses, and proceeds from the exercise of stock options and warrants. In addition to these sources, other sources of liquidity may include the raising of capital through additional private placements or public offerings of debt or equity securities. However, going forward some of these sources may not be available, or if available, they may not be on favorable terms. We will be required to generate funds to repay/refinance/extend our revolving credit facility and mortgage loan obligations during 2010. As of December 31, 2009, we had a working capital deficiency, which is partially due to having to classify our revolving line of credit and our mortgage loan as well as our factoring lines and our credit facility with Danske Bank, which are more fully discussed above and in Note 9 to our consolidated financial statements, as current liabilities on our consolidated balance sheet. Our debt obligation to Danske Bank is due on demand and we are required to reduce the amount available on the credit facility by approximately $0.1 million a month. Our factoring lines may also be amended or terminated by the lenders. These conditions indicate that we may not be able to continue operations at the current level, as we may be unable to generate the funds necessary to pay our obligations in the ordinary course of business.

Outlook

We are constantly looking for ways to maximize stockholder value. As such, we are continually seeking operational efficiencies and synergies within our operating segments as well as evaluating acquisitions of businesses and customer bases which complement our operations. These strategic initiatives may include acquisitions, raising additional funds through debt or equity offerings, refinancing existing debt obligations or the divestiture of business units that are not critical to our long-term strategy or other restructuring or rationalization of existing operations. We will continue to review all alternatives to ensure maximum appreciation of our stockholders’ investments. However, initiatives may not be found, or if found, they may not be on terms favorable to us.

ITEM 8. FINANCIAL STATEMENTS

Our consolidated financial statements included in this Annual Report are listed in Item 15 and begin immediately after the signature pages.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A(T). CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this report (the “Evaluation Date”). Based upon the evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective. Disclosure controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls include controls and procedures designed to reasonably ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Our quarterly evaluation of disclosure controls and procedures includes an evaluation of some components of our internal control over financial reporting, and internal control over financial reporting is also separately evaluated on an annual basis for purposes of providing the management report which is set forth below.

Report of Management on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining a comprehensive system of internal control over financial reporting to provide reasonable assurance of the proper authorization of transactions, the safeguarding of assets and the reliability of the financial records. Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. The system of internal control over financial reporting provides for appropriate division of responsibility and is documented by written policies and procedures that are communicated to employees. The framework upon which management relied in evaluating the effectiveness of our internal control over financial reporting was set forth in Internal Controls — Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission.

Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the U.S. Our internal control over financial reporting includes those policies and procedures that:

(i)

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

	(ii)		provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the U.S., and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and
	(iii)		provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.

Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2009. However, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in our business or other conditions, or that the degree of compliance with our policies or procedures may deteriorate.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this annual report.

Inherent Limitations of Disclosure Controls and Procedures and Internal Control over Financial Reporting

There are inherent limitations to the effectiveness of any control system. A control system, no matter how well conceived and operated, can provide only reasonable assurance that its objectives are met. No evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the degree of compliance with the policies and procedures may deteriorate.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the quarter ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. There were no significant deficiencies or material weaknesses, and therefore no corrective actions were taken.

PART III

The information required in Item 10 (Directors, Executive Officers and Corporate Governance), Item 11 (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters), Item 13 (Certain Relationships and Related Transactions, and Director Independence), and Item 14 (Principal Accountant Fees and Services) will be filed by amendment to this Annual Report on or before April 30, 2010 or incorporated by reference to our definitive proxy statement for the 2010 Annual Meeting of Stockholders to be filed with the SEC.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS

(a)(1)		The financial statements listed below are included in this report
		Report of Independent Registered Public Accounting Firm
		Financial Statements
		Consolidated Balance Sheets
		Consolidated Statements of Operations
		Consolidated Statements of Stockholders’ Equity
		Consolidated Statements of Cash Flows
		Notes to Consolidated Financial Statements
(a)(3)		Exhibits
		See the Exhibit Index filed as part of this Annual Report on Form 10-K.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature		Title		Date
/s/ Joseph J. Grillo		President, Chief Executive Officer and Director		April 1, 2010
(Joseph J. Grillo)		(Principal Executive Officer)
/s/ Lorraine M. Breece		Senior Vice President and Chief Financial Officer		April 1, 2010
(Lorraine M. Breece)		(Principal Accounting Officer)
/s/ Daniel E. Penni		Chairman of the Board of Directors		April 1, 2010
(Daniel E. Penni)
/s/ John R. Block		Director		April 1, 2010
(John R. Block)
/s/ Dennis G. Rawan		Director		April 1, 2010
(Dennis G. Rawan)
/s/ Michael S. Zarriello		Director		April 1, 2010
(Michael S. Zarriello)

DIGITAL ANGEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS

CONTENTS

		Page
Report of Independent Registered Public Accounting Firm			F-2
Consolidated Balance Sheets as of December 31, 2009 and 2008			F-3
Consolidated Statements of Operations for each of the years in the two-year period ended December 31, 2009			F-4
Consolidated Statements of Stockholders’ Equity for each of the years in the two-year period ended December 31, 2009			F-5
Consolidated Statements of Cash Flows for each of the years in the two-year period ended December 31, 2009			F-7
Notes to Consolidated Financial Statements			F-8

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Digital Angel Corporation

We have audited the accompanying consolidated balance sheets of Digital Angel Corporation and subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting as of December 31, 2009. Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements enumerated above present fairly, in all material respects, the consolidated financial position of Digital Angel Corporation and subsidiaries as of December 31, 2009 and 2008, and the consolidated results of their operations and their consolidated cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States.

/s/ Eisner LLP
New York, New York
March 31, 2010

Digital Angel Corporation and Subsidiaries

		December 31,
		2009				2008
ASSETS
Current assets:
Cash and cash equivalents		$	1,895			$	1,413
Restricted cash			202				—
Accounts receivable, net of allowance for doubtful accounts of $906 in 2009 and $476 in 2008			7,396				8,875
Note receivable			450				450
Inventories			9,836				7,143
Deferred taxes			—				130
Other current assets			2,064				1,433
Current assets of discontinued operations			1,853				4,345
Total current assets			23,696				23,789
Property and equipment, net			7,363				8,549
Goodwill, net			3,343				6,848
Intangibles, net			11,447				18,508
Note receivable			596				1,015
Other assets, net			599				322
Other assets of discontinued operations			—				5,175
Total assets		$	47,044			$	64,206
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt		$	9,297			$	8,581
Accounts payable			8,124				8,385
Advances from factors			1,241				1,494
Accrued expenses			6,580				7,737
Deferred gain on sale			960				—
Deferred revenue			548				840
Current liabilities of discontinued operations			2,514				2,705
Total current liabilities			29,264				29,742
Commitments and contingencies:
Long-term debt and notes payable			392				6,942
Deferred taxes			—				1,227
Other liabilities			1,445				2,223
Other liabilities of discontinued operations			—				1,367
Total liabilities			31,101				41,501
Stockholders’ equity:
Digital Angel Corporation stockholders’ equity:
Preferred shares ($10 par value; shares authorized, 5,000; shares issued, nil)			—				—
Common shares ($.01 par value; shares authorized 50,000; shares issued, 23,479 and 16,080; shares outstanding, 23,479 and 15,950)			235				161
Additional paid-in-capital			588,652				584,466
Accumulated deficit			(571,203	)			(558,839	)
Accumulated other comprehensive (loss) income — foreign currency translation			(1,737	)			(2,308	)
Subtotal			15,947				23,480
Treasury stock (carried at cost, nil and 130 shares)			—				(820	)
Total Digital Angel Corporation stockholders’ equity			15,947				22,660
Non-controlling interest			(4	)			45
Total stockholders’ equity			15,943				22,705
Total liabilities and stockholders’ equity		$	47,044			$	64,206

See the accompanying notes to consolidated financial statements.

Digital Angel Corporation and Subsidiaries

		For the years ended
		December 31,
		2009				2008
Revenue		$	49,463			$	62,260
Cost of sales			29,192				42,342
Gross profit			20,271				19,918
Selling, general and administrative expenses			24,638				30,415
Research and development expenses			1,206				1,993
Restructuring, severance and separation expenses			678				3,678
Goodwill and asset impairments			7,339				35,467
Operating loss			(13,590	)			(51,635	)
Interest and other income (expense), net			319				2,722
Interest expense			(2,176	)			(10,892	)
Loss from continuing operations before income tax benefit			(15,447	)			(59,805	)
Benefit from income taxes			24				165
Loss from continuing operations			(15,423	)			(59,640	)
Income from discontinued operations, net of income taxes of $608 and $0 (attributable to Digital Angel Corporation)			2,993				1,629
Net loss			(12,430	)			(58,011	)
Loss (income) attributable to the noncontrolling interest, continuing operations			110				(102	)
Income attributable to the noncontrolling interest, discontinued operations			(44	)			(20	)
Net loss attributable to Digital Angel Corporation		$	(12,364	)		$	(58,133	)
(Loss) income per common share attributable to Digital Angel Corporation common stockholders — basic and diluted:
Loss from continuing operations, net of noncontrolling interest		$	(0.82	)		$	(3.94	)
Income from discontinued operations, net of noncontrolling interest			0.16				0.11
Net loss		$	(0.66	)		$	(3.83	)
Weighted average number of common shares outstanding — basic and diluted			18,768				15,156

See the accompanying notes to consolidated financial statements.

Digital Angel Corporation and Subsidiaries

		Digital Angel Corporation Stockholders
																		Accumulated
										Additional								Other												Total
		Common Stock								Paid-In				Accumulated				Comprehensive				Treasury				Noncontrolling				Stockholders’
		Number				Amount				Capital				Deficit				Income (Loss)				Stock				Interest				Equity
Balance, December 31, 2007			13,135			$	131			$	573,565			$	(500,706	)		$	428			$	(2,423	)		$	13,365			$	84,360
Net loss			—				—				—				(58,133	)			—				—				122				(58,011	)
Comprehensive loss:
Foreign currency translation			—				—				—				—				(2,736	)			—				53				(2,683	)
Total comprehensive loss															(58,133	)			(2,736	)							175				(60,694	)
Acquisition of Geissler Technologies Corporation			1,488				15				6,864				—				—				—				—				6,879
Issuance of common stock for services			262				3				1,443				—				—				—				—				1,446
Issuance of common stock for financing			216				2				742				—				—				—				—				744
Issuance of restricted stock and stock options for services			31				—				441				—				—				—				—				441
Issuance of shares in connection with warrants exercised			22				—				—				—				—				—				—				—
Issuance of common stock for legal settlement			162				2				498				—				—				—				—				500
Re-pricing of common stock warrants			—				—				1,112				—				—				—				—				1,112
Exercise of common stock warrants			778				8				2,307				—				—				—				—				2,315
Stock issuance costs			—				—				(73	)			—				—				—				—				(73	)
Treasury shares issued to affiliate			—				—				(646	)			—				—				646				—				—
Retirement of treasury shares			—				—				(1,777	)			—				—				1,777				—				—
Treasury shares acquired under severance agreement			—				—				—				—				—				(820	)			—				(820	)
Partial share repurchase			(14	)			—				(10	)			—				—				—				—				(10	)
Changes in noncontrolling interest as a result of other capital transactions by subsidiaries			—				—				—				—				—				—				(13,495	)			(13,495	)
Balance, December 31, 2008			16,080			$	161			$	584,466			$	(558,839	)		$	(2,308	)		$	(820	)		$	45			$	22,705

See the accompanying notes to consolidated financial statements.

Digital Angel Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Equity (continued)
For the Years Ended December 31, 2009 and 2008
(in thousands)

		Digital Angel Corporation Stockholders
																		Accumulated
										Additional								Other												Total
		Common Stock								Paid-In				Accumulated				Comprehensive				Treasury				Noncontrolling				Stockholders’
		Number				Amount				Capital				Deficit				Income (Loss)				Stock				Interest				Equity
Balance, December 31, 2008 (brought forward)			16,080			$	161			$	584,466			$	(558,839	)		$	(2,308	)		$	(820	)		$	45			$	22,705
Net loss			—				—				—				(12,364	)			—				—				(66	)			(12,430	)
Comprehensive loss:
Foreign currency translation			—				—				—				—				571				—				17				588
Total comprehensive loss															(12,364	)			571								(49	)			(11,842	)
Issuance of common stock under the Standby Equity Distribution Agreement			2,880				29				2,776				—				—				—				—				2,805
Issuance of common stock for equipment purchase			296				3				183				—				—				—				—				186
Issuance of common stock in a private placement sale			255				2				125				—				—				—				—				127
Issuance of common stock for price protection under the terms of a legal settlement			960				10				(10	)			—				—				—				—				—
Issuance of common stock under the terms of a legal settlement			357				4				396				—				—				—				—				400
Issuance of common stock for Geissler Technologies Corporation earn out			330				3				297				—				—				—				—				300
Retirement of treasury stock			295				3				(823	)			—				—				820				—				—
Issuance of common stock for services			101				1				125				—				—				—				—				126
Issuance of common stock for financing			1,393				14				786				—				—				—				—				800
Issuance of restricted stock and stock options for services			453				4				(4	)			—				—				—				—				—
Partial share repurchase			(8	)			—				—				—				—				—				—				—
Retirement of common stock			(1	)			—				—				—				—				—				—				—
Share-based compensation expense			—				—				519				—				—				—				—				519
Stock issuance costs											(129	)			—				—				—				—				(129	)
Issuance of common stock for SEDA commitment fee			88				1				124				—				—				—				—				125
Amortization of SEDA commitment fee			—				—				(125	)			—				—				—				—				(125	)
Reclassification of warrant as liability per EITF 07-5			—				—				(54	)			—				—				—				—				(54	)
Balance, December 31, 2009			23,479			$	235			$	588,652			$	(571,203	)		$	(1,737	)		$	—			$	(4	)		$	15,943